-1-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
or
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________ to__________
Commission file number
Marlin Business Services Corp.
(Exact name of Registrant as specified in its charter)
(State of incorporation)
(I.R.S. Employer Identification No.)
,
,
(Address of principal executive offices)
Registrant’s telephone number,
including area code:
(
)
Securities registered pursuant to Section
12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Securities registered pursuant to Section
12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
☐
☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
☐
☑
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during
the preceding
12 months (or
for such
shorter period
that the
Registrant was
required to
file such
reports), and
(2) has been
subject to
such filing requirements for the past 90 days.
☑
☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that registrant was required to submit and such files.)
☑
☐
company,
or
an
emerging
growth
company.
See
definition
of
“large
accelerated
filer,”
“accelerated
filer,”
“smaller
reporting
company,”
and
“emerging growth company” in Rule 12b-2
of the Exchange Act
.
☐
☑
☐
-2-
If an emerging
growth company,
indicate by check
mark if the registrant
has elected not
to use the
extended transition period
for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report .
☐
☑
The aggregate market value of the voting common stock held by non-affiliates of the Registrant, based on the closing price of such shares on the
NASDAQ Global Select Market was approximately $
conclusive determination for other purposes.
DOCUMENTS INCORPORATED
BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement related to the 2021 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission within 120 days of the close of Registrant’s fiscal year, are incorporated by reference into Part III of this Form 10-K.
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MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
FORM 10-K
INDEX
Page
No.
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...
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PART
I
-4-
As used herein, the terms “Company,”
“Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services Corp.
and its
subsidiaries.
Item 1.
Overview
We are a nationwide
provider of credit products and services to small businesses and were incorporated
in the Commonwealth of
Pennsylvania in 2003. In 2008, we opened Marlin Business Bank (“MBB”), a commercial
bank chartered by the State of Utah and a
member of the Federal Reserve System, which serves as the Company’s
primary funding source through its issuance of Federal
Deposit Insurance Corporation (“FDIC”)-insured deposits.
In 2009, Marlin Business Services Corp. became a bank holding company
subject to the Bank Holding Company Act and in 2010, the Federal Reserve
Bank of Philadelphia confirmed the effectiveness of
Marlin Business Services Corp.’s
election to become a financial holding company (while remaining a bank
holding company)
pursuant to Sections 4(k) and (l) of the Bank Holding Company Act and
Section 225.82 of the Federal Reserve Board's Regulation Y.
Such election permits Marlin Business Services Corp. to engage
in activities that are financial in nature or incidental to a financial
activity, including
the maintenance and expansion of our reinsurance activities conducted through
our wholly-owned subsidiary,
AssuranceOne, Ltd. (“AssuranceOne”).
The products and services we provide to our customers include loans and leases for
the acquisition of commercial equipment and
working capital loans.
Our average original transaction size was approximately $18,000 at December
31, 2020 and our average net
investment on Equipment Finance contracts as of December 31, 2020 was approximately
$11,000.
We acquire our small business
customers primarily by offering equipment financing
through independent commercial equipment dealers and various national account
programs, through direct solicitation of our small business customers and
through relationships with select lease and loan brokers.
Through these origination partners, we are able to cost-effectively
access small business customers while also helping our origination
partners obtain financing for their customers. As of December 31, 2020,
we serviced approximately 80,000 finance contracts having a
total original value of $1.5 billion for approximately 68,000 small business customers.
The small balance commercial financing market is highly fragmented.
We estimate that there are
more than 100,000 independent
commercial equipment dealers and other intermediaries who sell the types
of equipment we finance or require the types of financing
we provide. We
believe this segment of equipment dealers is underserved because: (1) large
commercial finance companies and large
commercial banks typically concentrate their efforts
on marketing their products and services directly to larger equipment
manufacturers and larger distributors, rather than
to independent equipment dealers; and (2) many smaller commercial finance
companies and regional banking institutions have not developed the
systems and infrastructure required to adequately service large
volumes of low-balance transactions. We
focus on establishing our relationships with independent equipment
dealers who value
convenient point-of-sale financing programs because we can make
their sale process more effective. By providing them with the
ability to offer our financing and related services to
their customers as an integrated part of their selling process, our origination
partners are able to increase their sales and provide better service to their
customers. By doing this, we are also able to gather small
business customers to which we can sell additional credit products and services
through our fully integrated origination platform,
which allows us to efficiently solicit, process and service
a large number of low-balance financing transactions.
We generate
revenue through net interest margin on our owned portfolio
of leases and loans, from originating new contracts to
generate fee income and to replenish our owned portfolio, and we may
sell populations of finance receivables to third parties in the
capital markets as a source of liquidity and to manage the size and composition
of our balance sheet and capital levels.
We manage
risk to our portfolio through performing a comprehensive credit underwriting
process for our origination partners and small business
customers, and we continually monitor and analyze the performance
of our portfolio, assess our delinquency and credit loss
experience against our underwriting criteria and determine whether
our performance is commensurate with our intended risk
tolerance.
The following discussion outlines the significant products, services and
revenue-generating activities of our business.
Origination Channels
We use multiple
sales origination channels to access the highly diversified and fragmented
small-ticket equipment leasing market,
including both direct and indirect origination channels.
-5-
Indirect Channel
s.
Our indirect sales origination
channels, which account for approximately [90%]
of the active lease contracts in our
portfolio, involve:
•
Independent Equipment Dealer Solicitations.
with independent equipment dealers in a variety of equipment categories located
across the United States. Service is a key
determinant in becoming the preferred provider of financing recommended
by these equipment dealers.
• Major and National Accounts.
This channel focuses on two specific areas of development: (i) national
equipment
manufacturers and distributors, where we seek to leverage their endorsements
to become the preferred lease financing source
for their independent dealers, and (ii) major accounts (larger
independent dealers, distributors and manufacturers)
with a
consistent flow of business that need a specialized marketing and sales platform
to convert more sales using a leasing option.
• Brokers.
our relationships with lease brokers and certain equipment dealers who ref
er small business customer transactions to us for a
fee or sell us leases that they originated with small business customers. We
conduct our own independent credit analysis on
each small business customer in a broker lease transaction. We
have written agreements with most of our broker origination
partners
whereby they provide us with certain representations and warranties about the
underlying lease transaction. The
origination partners
in our broker channels generate leases that are similar to those generated by our direct
channels.
Direct Channel
.
This channel focuses primarily on soliciting our existing portfolio of
approximately 68,000 small business customers
for additional equipment leasing or working capital opportunities. We
view our existing small business customers as an excellent
source for additional business for various
reasons, including (i) retained credit information; (ii) payment history; and
(iii) a
demonstrated propensity to finance their equipment.
Product Offerings
Equipment Loans and Leases.
Company remains the owner of the equipment during the lease term.
An equipment lease may have an option at the end of the term
for the lessee to purchase the equipment, whereas with an equipment loan,
the borrower
purchases equipment with the loan proceeds.
In the case of equipment loans, the borrower is the owner of the equipment
during the loan period but the equipment is collateral for
the loan. Once the loan is fully repaid the equipment is no longer collateral.
The types of lease and loan products offered by each of
our sales origination channels share common characteristics, and
we generally underwrite our contracts using the same criteria.
We use the direct
finance method of accounting to record our sales-type leases and related
interest income. At the time of lease
application, small business customers select a purchase option that will allow
them to purchase the equipment at the end of the
contract term for either one dollar, the fair
market value of the equipment or a specified percentage of the original equipment cost. We
seek to realize our recorded residual in leased equipment at the end of the
initial lease term by collecting the purchase option price
from the small business customer, re-marketing
the equipment in the secondary market or receiving additional rental payments
pursuant to the applicable contract’s
renewal provision.
Our leases provide for non-cancelable rental payments due during the initial
lease term.
The terms
of our equipment finance leases and loans is equal to or less than the equipment’s
economic life, and generally ranges
from
36 to 72 months. At December 31, 2020,
the average original term of the equipment finance contracts
in our portfolio was
approximately 50 months, and we had personal guarantees on approximately
31% of our portfolio.
The remaining terms and
conditions of our contracts are substantially similar,
generally requiring small business customers to, among other things:
•
address any maintenance or service issues directly with the equipment
dealer or manufacturer;
•
insure the equipment against property and casualty loss;
•
pay or reimburse us for all taxes associated with the equipment;
•
use the equipment only for business purposes; and
•
make all scheduled payments regardless of the performance of the
equipment.
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We charge
late fees when appropriate throughout the term of the equipment finance lease or loan
.
Our standard contract provides that
in the event of a default, we can require payment of the entire balance
due under the lease through the initial term and can take action
to seize and remove the equipment collateral for subsequent sale, refinancing
or other disposal at our discretion, subject to any
limitations imposed by law.
Property Insurance on Leased Equipment.
an amount sufficient to cover the value of the equipment
and to designate us as the loss payee on the policy.
If the customer already
has a commercial property policy for its business, it can satisfy its obligation
under the lease by delivering a certificate of insurance
that evidences us as the loss payee under that policy.
At December 31, 2020,
approximately 51% of our small business customers
insured the equipment under their existing policies. For the others, we have
a master property insurance policy underwritten by a third-
party national insurance company that is licensed to write insurance
under our program in all 50 states and the District of Columbia.
This master policy names us as the beneficiary for all of the equipment
insured under the policy and provides all-risk coverage for the
value of the equipment.
Through AssuranceOne, our Bermuda-based, wholly-owned captive
insurance subsidiary we reinsure the property insurance coverage
for the equipment financed by Marlin Leasing Corporation and MBB for
our small business customers.
Under this contract,
AssuranceOne reinsures 100% of the risk under the master policy,
and the issuing insurer pays AssuranceOne the policy premiums,
less claims, premium tax and a ceding fee based on a percentage of annual
net premiums written. The reinsurance contract is
scheduled to expire in September 2023.
As a Class 3 insurer under the Bermuda Insurance Act of 1978, as amended,
AssuranceOne is
permitted to collect up to 50% of its premiums in connection with insurance
coverage on equipment unrelated to the Company,
meaning that, through AssuranceOne, we may offer an
insurance product to cover equipment not otherwise financed through the
Company.
Working
Capital Loans
. In 2015, the Company launched Funding Stream, a flexible loan program of MBB. The
success of this
program and the growing demand by small businesses for convenient
working capital solutions prompted the Company to update the
name of this program to Working
Capital Loans in 2018, while maintaining its commitment to a convenient, hassle-free
alternative to
traditional lenders and access to capital to help companies grow their business
es. Generally, these loans range
from $5,000 to
$150,000,
have 6 to 24 month terms, and have automated daily or weekly payback.
Business owners can apply online, in ten minutes
or less, on MarlinCapitalSolutions.com.
Approved borrowers can receive funds in as little as two days.
Portfolio Overview
Equipment Finance.
At December 31, 2020,
we had approximately 80,000 active Equipment Finance leases and loans in our
portfolio, representing a period ending net investment in Equipment
Finance lease and loans, excluding the allowance for credit losses,
of $849.0 million. With respect to our portfolio
at December 31, 2020:
•
the average original Equipment Finance lease and loan transaction was approximately
$18,000,
with an average remaining
balance of approximately $12,000;
•
the average original Equipment Finance lease and loan term was approximately
50 months;
•
our active Equipment Finance lease and loans were spread among approximately
68,000 different small business customers, with
the largest single small business customer accounting
for only 0.16% of the aggregate Equipment Finance minimum lease and
loan payments receivable;
•
over 75.4% of the aggregate minimum Equipment Finance lease and
loan payments receivable were with small business
customers who had been in business for more than five years;
•
the portfolio was spread among 10,707 origination partners, with the largest
source accounting for only 5.91% of the aggregate
Equipment Finance minimum lease and loan payments receivable,
and our 10 largest origination partners
account for only 18.4%
of the aggregate Equipment Finance minimum lease and loan payments receivable;
•
there
were
over
100
different
equipment
categories
financed,
with
the
largest
categories
set
forth
on
the
following
tables;
and
•
we
had
leases
outstanding
with
small
business
cu
stomers
located
in
all
50
states
and
the
District
of
Columbia,
with
our
largest
states of origination, as set forth in the following tables.
-7-
Working
Capital:
As of December 31, 2020,
the Company had approximately 870 Working
Capital Loans with a book value of $20.0
million on the balance sheet, excluding the allowance for credit losses. Approximately
50% of our Working
Capital Loan customers
renew financing with Marlin.
The following tables outline the concentrations by state, industry,
and equipment category as a percentage of the net investment
receivable for our portfolio as of December 31, 2020:
Top 10
Industries, by Borrower SIC Code
Top 10
States
Equipment
Equipment
Finance
Working
Finance
Working
and CVG
Capital
and CVG
Capital
Medical
13.7
%
8.1
%
CA
14.0
%
10.7
%
Misc. Services
11.9
8.3
TX
11.7
11.4
Retail
10.1
13.0
FL
9.4
8.7
Construction
8.9
11.0
NY
6.8
6.0
Restaurants
6.8
6.5
NJ
4.6
6.5
Professional Services
6.6
5.5
PA
3.5
4.6
Manufacturing
6.0
7.5
GA
3.4
3.7
Transportation
5.3
2.6
IL
3.3
5.9
Trucking
4.3
1.8
NC
3.2
2.6
Automotive
3.3
6.1
MA
3.2
2.4
All Other
23.1
29.6
All Other
36.9
37.5
Total
100
%
100
%
Total
100
%
100
%
Equipment Type
Equipment
Finance
Working
and CVG
Capital
Copiers
20.9
%
Titled V-Commercial
13.2
n/a
Commerce & Indus
8.3
Restaurant
4.8
Dental Systems
4.7
Medical
4.2
Office Furniture
2.5
Computer Software
1.8
Automotive General
1.7
Machine Tool
1.6
All other
36.3
Total
100.00
%
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Markets and Competition
In response to the COVID-19 pandemic, we initially focused our
efforts on protecting the value of our portfolio and assisting our
customers that had been negatively impacted by the pandemic, including
initiating a loan modification program in response to the
pandemic, and by assisting some of our borrowers by originating loans
guaranteed under the Small Business Administration’s
(SBA’s)
Paycheck Protection Program (“PPP”).
In addition, in response to the onset of the pandemic, we temporarily tightened
underwriting
standards for areas of elevated risk, and we continue to update such risk assessments based
on current conditions.
Consistent with other market participants, after the onset of the pandemic
we have experienced
softer demand for financing by the
small business community we service due to challenges facing many industries
resulting from the continued economic fallout of
COVID-19 across much of the United States.
In addition, we have noticed some lessors extending the terms of leases for
their current
equipment, rather than entering into commitments to purchase and finance
new equipment, which may be driven by the uncertainties
of this environment.
In response to the potential impacts on our business resulting from the pandemic, we
took a series of actions to
preserve our capital and liquidity and reposition the business for success
once the full effects of the pandemic are realized and the
economy begins to recovery.
These actions included: (i) temporary re-allocation of resources from
front-end origination activities to
portfolio servicing and collection activities (ii) cost reduction initiatives that
led to a permanent reduction of approximately 80
employees and (iii) a re-organization of origination and processing
platforms
to accelerate automation and digitization.
We are
currently targeting the rollout of our digital origination platform,
which we are calling Express, by the middle of 2021.
We are
continuing to monitor the evolving health crisis, and its impacts on our operations
and ability to serve our customers in this changing
environment.
Any return to pre-pandemic levels of activity,
and the long-term impacts of this crisis on our market, remains uncertain
and will be dependent on,
among other things, the timing and pace of the macro-economic recovery
and the execution of the strategy
that we undertook in 2020.
We compete
with a variety of equipment financing sources that are available to small and mid
-sized businesses, including:
•
national, regional and local banks and finance companies that provide
leases and loan products;
•
financing through captive finance and leasing companies affiliated
with major equipment manufacturers;
•
FinTech companies;
•
working capital lenders;
•
corporate credit cards; and
•
commercial banks, savings and loan associations and credit unions.
Our principal competitors in the small-ticket equipment finance market
are independent finance companies, local and regional banks
and, to a lesser extent, in the case of our national accounts channels, national
providers of equipment financing, some of which are
national banks with leasing divisions. Many of our national competitors
are substantially larger than we are and generally focus on
larger ticket transactions and in some cases international
programs. We compete
on the quality of service we provide to our
origination partners
and small business customers,
as well as the pricing of our equipment finance and working capital products.
With
the introduction of our Working
Capital Loans,
we also compete with FinTech
lenders. We have encountered
and will continue to
encounter significant competition.
We believe several
characteristics may distinguish us from our competitors, including
the following:
Multiple Sales Origination Channels.
fragmented small-ticket equipment finance market.
We use both direct
and indirect origination channels.
Our direct channel involves
soliciting our existing small business customer base for repeat business as well as identifying
other small business customers who
need financing.
The indirect channel sources financing opportunities through our partner network
and our broker network. Our
indirect origination channels, which accounted for approximately
83% of the 2020 lease and loan new origination volume, involve:
(1) establishing relationships with independent equipment dealers; (2)
securing endorsements from national equipment manufacturers
and distributors to become the preferred lease financing source for the independent
dealers who sell their equipment; and
(3) establishing relationships with independent brokers who identify
opportunities for us. Our broker network accounted for 24% of
the indirect channel’s 2020
lease and loan new origination volume.
Our direct origination channel accounted for approximately 17%
-9-
of the 2020 lease and loan new origination volume.
Highly Effective Account Origination Platform.
account executives offer origination partners a high
level of personalized service through our team of sales account executives and
sales support personnel. Our business model is built on a real-time, fully
integrated customer information database and a contact
management and telephony application that facilitate our
account solicitation and servicing functions.
Comprehensive Credit Process.
portfolio levels. Our comprehensive credit process starts with the qualification
and ongoing review of our origination partners. Once
the origination partner is approved, our credit process focuses on analyzing
and underwriting the small business customer and the
specific financing transaction, regardless of whether the transaction
was originated through our direct or indirect origination channels.
Our underwriting process involves the use of our customized acquisition
scorecards along with detailed rules-based analysis
conducted by our team of seasoned credit analysts.
Portfolio Diversification.
portfolio balance and leases from our largest origination partner
accounted for only 5.91% of our portfolio. Our portfolio is also
diversified nationwide with the largest state portfolios existing
in California, Texas and Florida,
and we have a diverse equipment type
and industry group represented in our portfolio, as outlined in the above
tables.
Fully Integrated Information Management System.
origination, credit, collection and account servicing functions. Throughout
a transaction, we collect a significant amount of
information on our origination partners and small business customers.
The enterprise-wide integration of our systems enables data
collected by one group, such as credit, to be used by other groups,
such as sales or collections, to better perform their functions.
Sophisticated Collections Environment.
credit losses and maximize post charge-off recovery
dollars. Our collection strategy employs a delinquency bucket segmentation
approach, where certain collectors are assigned to accounts based on their
delinquency status. We
also stratify and assign our accounts
to collectors based on other relevant criteria, such as customers with an early
missed payment, risk profile and transaction size. This
segmentation approach allows us to assign our more experienced collectors
to the late stage delinquent accounts. In addition, the
collections department also focuses on collecting delinquent late fees,
property taxes, and other outstanding amounts due under the
customer’s contracts.
Access to Multiple Funding Sources.
subsidiary, MBB.
MBB is currently our primary funding source through the issuance of fixed and
variable rate FDIC-insured deposits
raised nationally through direct platforms, listing services, and through
various deposit brokers. We
believe that our proven ability to
access funding consistently at competitive rates through various economic
cycles provides us with the liquidity necessary to manage
our business. (See
Experienced Management Team.
we have grown, we have expanded the management team with a group of
successful, seasoned executives.
Government Regulation
The banking
industry is heavily
regulated, and
such regulations are
intended primarily
for the protection
of depositors and
the federal
deposit
insurance
funds,
not
shareholders.
Since
becoming
a
bank
holding
company
on January
13,
2009,
we
have
been
subject
to
regulation
by
the
Federal
Reserve
Board
and
the
Federal
Reserve
Bank
of
Philadelphia
and
subject
to
the
Bank
Holding
Company
Act.
Our
bank
subsidiary,
MBB,
is
also
subject
to
regulation
by
the
Federal
Reserve
Board,
the
Federal
Reserve
Board
of
San
Francisco,
and
the
Utah
Department
of
Financial
Institutions.
Such
regulation
affects
our
lending
practices,
capital
structure,
investment practices, dividend policy and growth.
See further
discussion in
“Risk Factors—Regulations—
Government regulation
significantly affects
our business.
Further changes
in
regulations that
impact our business may have
a significant impact on our
business, results of
operations, and financial condition.”
Item 1A of this Form 10-K.
We believe that
we currently are in substantial compliance with all material statutes and regulations
that are applicable to our business.
-10-
Certain of the regulatory requirements that
are applicable to Marlin Business Services Corp.,
MBB and our other subsidiaries are
described below.
This description of statutes and regulations is not intended to be a complete explanation
of such statutes and
regulations and their effects on us and our subsidiaries and is qualified
in its entirety by reference to the actual statutes and regulations.
Banking Regulation.
Our subsidiary,
Marlin Business Bank, is a Utah state-chartered Federal Reserve member bank and is supervised
by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial Institutions
(the “Department”).
We are a registered
bank
holding company under the Bank Holding Company Act and are
supervised by the Federal Reserve Board, including the Federal
Reserve Bank of Philadelphia.
We elected to become
a financial holding company (while remaining a bank holding company)
and the
Bank Holding Company Act, as modified by the Gramm-Leach-Bliley
Act, permits us to engage in a wider range of financial
activities deemed to be “financial in nature”
including lending, exchanging, transferring, investing for others, safeguarding
money or
securities, providing financial, investment or economic advisory
services and underwriting, dealing in, or making a market in
securities.
Our status as a financial holding company permits the Company to
conduct reinsurance activities through our
AssuranceOne subsidiary.
Federal law provides the federal banking regulators, including the FDIC and
the Federal Reserve Board, with substantial enforcement
powers. This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist
or removal orders, and to initiate injunctive actions against banking organizations
and institution-affiliated parties. In general, these
enforcement actions may be initiated for violations of laws and regulations
and unsafe or unsound practices. Other actions or inactions
may provide the basis for enforcement action, including misleading
or untimely reports filed with regulatory authorities.
Federal and state laws and regulations which are applicable to banks
regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the payment of dividends,
the timing of the availability of deposited funds and the nature
and amount of and collateral for certain loans. There are periodic examinations
by the Department and the FDIC to test our
compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for
the protection of the insurance fund and depositors. The regulatory
structure also gives the regulatory authorities extensive discretion in connection
with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification
of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether
by the Department, the FDIC, the Federal Reserve Board or Congress
could have a material adverse impact on our operations.
Capital Adequacy.
The Company and MBB operate under the Basel III capital adequacy standards
adopted by the federal bank regulatory agencies
effective on January 1, 2015, as modified by certain provisions
of the Dodd-Frank Act that became fully effective on January 1,
2019.
Under the risk-based capital requirements applicable to them, bank
holding companies must maintain a ratio of total capital to risk-
weighted assets (including the asset equivalent of certain off
-balance sheet activities such as acceptances and letters of credit) of not
less than 8% (10% in order to be considered “well-capitalized”).
The requirements include a 6% minimum Tier
1 risk-based ratio (8%
to be considered well-capitalized). Tier 1 Capital,
as defined in the implementing regulations, consists of common stock, related
surplus, retained earnings, qualifying perpetual preferred stock and minority
interests in the equity accounts of certain consolidated
subsidiaries, after deducting goodwill and certain other intangibles.
The remainder of total capital (“Tier 2 Capital”)
may consist of
certain perpetual debt securities, mandatory convertible debt securities, hybrid
capital instruments and limited amounts of
subordinated debt, qualifying preferred stock, allowance for credit
losses on loans and leases, allowance for credit losses on off-
balance-sheet credit exposures and unrealized gains on equity securities. At December
31, 2020,
the Company’s Tier
1 Capital and
total capital ratios were 22.74% and 24.04%,
respectively.
The capital standards
require a minimum Tier 1 leverage ratio of 4%. The
capital requirements also now require a new common equity
Tier 1 risk-based capital ratio with a required
minimum of 4.5% (6.5%
to be considered well-capitalized). The Federal Reserve
Board’s guidelines also provide
that bank holding companies experiencing internal growth or making acquisitions
are expected to
maintain capital positions substantially above the minimum supervisory
levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will continue
to consider a “tangible tier 1 leverage ratio” (
i.e.
,
after deducting all intangibles) in evaluating proposals for expansion
or new activities.
MBB is subject to similar capital standards. At
December 31, 2020,
the Company’s leverage and common
equity ratios were 18.78% and 22.74%,
respectively.
-11-
The Company is required to have a level of regulatory capital in excess of
the regulatory minimum and to have a capital buffer above
2.5% for 2020 and thereafter.
If a banking organization does not maintain capital above
the minimum plus the capital conservation
buffer it may be subject to restrictions on dividends, share buybacks,
and certain discretionary payments such as bonus payments.
Prompt Corrective Action
.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”) requires federal regulators to take prompt
corrective action against any undercapitalized institution.
Five capital categories have been established under federal banking
regulations: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
Well-capitalized
institutions significantly exceed the required minimum level for
each relevant capital measure.
Adequately
capitalized institutions include depository institutions that meet but do not
significantly exceed the required minimum level for each
relevant capital measure. Undercapitalized institutions consist of those
that fail to meet the required minimum level for one or more
relevant capital measures.
Significantly undercapitalized depository institutions consist of those with capital
levels significantly below
the minimum requirements for any relevant capital measure.
Critically undercapitalized depository institutions are those with minimal
capital and at serious risk for government seizure.
Under certain circumstances, a well-capitalized, adequately capitalized
or undercapitalized institution may be treated as if the
institution were in the next lower capital category.
A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company
if the institution would thereafter be undercapitalized.
Institutions that are adequately capitalized but not well-capitalized
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that
can be paid on such deposits.
Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
in certain cases, required to take certain actions with respect to institutions
falling within one of the three undercapitalized categories.
Depending on the level of an institution’s
capital, the agency’s corrective
powers include, among other things:
•
prohibiting
the
payment
of
principal
and
interest
on
subordinated
debt;
•
prohibiting
the
holding
com
pany
from
making
distributions
without
prior
regulatory
approval;
•
placing
limits
on
asset
growth
and
restrictions
on
activities;
•
placing
additional
restrictions
on
transactions
with
affiliates;
•
restricting
the
interest
rate
th
e
institution
may
pay
on
deposits;
•
prohibiting
the
institution
from
accepting
deposits
from
correspondent
banks;
and
•
in
the
most
severe
cases,
appointing
a
conservator
or
receiver
for
the
institution.
A banking institution that is undercapitalized is required to submit a capit
al restoration plan and such a plan will not be accepted
unless, among other things, the banking institution’s
holding company guarantees the plan up to a certain specified amount.
Any such
guarantee from a depository institution’s
holding company is entitled to a priority of payment in bankruptcy.
MBB’s Tier 1 Capital
balance was $148.3 million at December 31, 2020,
resulting in a Tier 1 leverage ratio, common
equity Tier 1 risk based ratio, Tier
1
risk-based capital ratio and a total risk-based capital ratio of 15.26%
,
18.23%,
18.23% and 19.53%, respectively,
which exceeded the
regulatory requirements for well-capitalized status of 5%, 6.5%, 8% and
10%, respectively.
Pursuant to the FDIC Agreement entered into in conjunction with the opening
of MBB, MBB was required to keep its total risk-based
capital ratio above 15%. On March 25, 2020, MBB received notice from
the FDIC that it had approved MBB’s request to
rescind
certain nonstandard conditions in the FDIC’s
order granting federal deposit insurance issued on March 20, 2007. Furthermore,
effective March 26, 2020, the FDIC, the Company
and certain of the Company’s subsidiaries terminated
the Capital Maintenance and
Liquidity Agreement (the “CMLA Agreement”) and the Parent Company
Agreement, each entered into by and among the Company,
certain of its subsidiaries and the FDIC in conjunction with the opening of
MBB. As a result of these actions, MBB is no longer
required pursuant to the CMLA Agreement to maintain a total risk-based capital
ratio above 15%. Rather, MBB must continue
to
maintain a total risk-based capital ratio above 10% in order to maintain
“well-capitalized” status as defined by banking regulations,
while the Company must continue to maintain a total risk-based capital ratio as discussed
in the preceding paragraphs.
-12-
The federal banking agencies’ final regulatory capital rules, discussed above,
also modify the above prompt corrective action
requirements to add a common equity tier 1 risk-based ratio requirement,
and increase certain other capital requirements for the
various prompt corrective action thresholds. For example, the requirements
for a bank to be considered well-capitalized under the
rules are a 5.0% tier 1 leverage ratio, a 6.5% common equity tier 1 risk-based ratio,
an 8.0% tier 1 risk-based capital ratio and a 10.0%
total risk-based capital ratio. To
be adequately capitalized, those ratios are 4.0%, 4.5%, 6.0% and 8.0%, respectively.
Federal Deposit Insurance.
The deposits of MBB are insured to the maximum extent permitted by the Deposit
Insurance Fund (the “DIF”) and are backed by the
full faith and credit of the U.S. Government. The Dodd-Frank Act increased
deposit insurance on most accounts to $250,000. As
insurer, the FDIC is authorized to conduct
examinations of, and to require reporting by,
insured institutions. It also may prohibit any
insured institution from engaging in any activity determined by
regulation or order to pose a serious threat to the FDIC. The FDIC also
has the authority to initiate enforcement actions against savings institutions.
The FDIC’s risk-based premium
system for FDIC deposit insurance is governed by the Federal Deposit Insurance
Reform Act of
2005, as amended by certain provisions of the Dodd-Frank Act. The
FDIC changed its risk-based premium system for FDIC deposit
insurance which now includes quarterly assessments of FDIC-insured
institutions based on their respective rankings in one of four risk
categories depending upon their examination ratings and capital ratios.
The FDIC capital assessment base now includes
consolidated
total assets minus tangible equity capital, defined as Tier
1 Capital. Institutions in FDIC-assigned Risk Categories II, III and IV are
assessed premiums at progressively higher rates.
The Dodd Frank Act raised the minimum reserve ratio of the Deposit Insurance
Fund from 1.15% to 1.35% and requires the FDIC to
offset the effect of this increase on insured institutions
with assets of less than $10 billion (small institutions).
Small institutions will
receive credits for the portion of their regular assessments that contributed
to growth in the reserve ratio between 1.15% and 1.35%.
When the reserve ratio is at or above 1.38%, the FDIC will automatically apply a small
bank's credits to reduce its regular assessment
up to the entire amount of the assessment.
If the reserve ratio exceeds 1.5%, the FDIC must dividend to DIF members the amount
above the amount necessary to maintain the DIF at 1.5%, but the FDIC Board
of Directors may, in
its sole discretion, suspend or limit
the declaration of payment of dividends.
Source of Strength
Doctrine
.
Under the provisions of the Dodd-Frank Act, as well as Federal Reserve Board
policy and regulation, a bank holding company must
serve as a source of financial and managerial strength to each of its subsidiary
banks and is expected to stand prepared to commit
resources to support each of them.
Consistent with this policy,
the Federal Reserve Board has stated that, as a matter of prudent
banking, a bank holding company should generally not maintain a given rate
of cash dividends unless its net income available to
common shareholders has been sufficient to fully fund
the dividends and the prospective rate of earnings retention appears to be
consistent with the organization’s
capital needs, asset quality and overall financial condition.
National Monetary Policy
.
In addition to being affected by general economic conditions,
the earnings and growth of the Company and MBB are affected
by the
policies of the Federal Reserve Board.
An important function of the Federal Reserve Board is to regulate the money supply
and credit
conditions.
Among the instruments used by the Federal Reserve Board to implement these objectives
are open market operations in
U.S. government securities, adjustments of the discount rate and changes
in reserve requirements against bank deposits.
These
instruments are used in varying combinations to influence overall economic
growth and the distribution of credit, bank loans,
investments and deposits.
Their use also affects interest rates charged on
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board
have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the future.
The effects of such policies upon our future business,
earnings and growth cannot be predicted.
Dividends
.
The Federal Reserve Board has issued policy statements requiring
insured banks and bank holding companies to have an established
assessment process for maintaining capital commensurate with their
overall risk profile. Such assessment process may affect the
ability of the organizations to pay dividends. Although
generally organizations may pay dividends only out of
current operating
earnings, dividends may be paid if the distribution is prudent relative to the organization’s
financial position and risk profile, after
-13-
consideration of current and prospective economic conditions. MBB’s
ability to pay dividends to the Company is subject to various
regulatory requirements, including Title
12 part 208 of the Code of Federal Regulations (12 CFR 208.5), which places limitations
on
bank dividends. Such limitations applicable to MBB include requiring
the approval of the Federal Reserve Board for the payment of
dividends by the bank subsidiary in any calendar year if the total of all dividends
declared by the bank in that calendar year, including
the proposed dividend, exceeds the current year’s
net income combined with the retained net income for the two preceding calendar
years. “Retained net income” for any period means the net income for that period
less any common or preferred stock dividends
declared in that period. Moreover, no dividends
may be paid by such bank in excess of its undivided profits account.
Furthermore, as
discussed under “
Source of Strength Doctrine
”, as a bank holding company, the
Company’s ability to pay dividends to its shareholders
is also subject to various regulatory requirements, including Supervisory
Letter SR 09-4, Applying Supervisory Guidance and
Regulations on the Payment of Dividends, Stock Redemptions and Stock
Repurchases at Bank Holding Companies.
Transfers of Funds and Transactions
with Affiliates.
Regulations governing the Company and its affiliates,
including sections 23A and 23B of the Federal Reserve Act, impose restrictions
on MBB that limit the transfer of funds by MBB to Marlin Business Services Corp.
and certain of its affiliates, in the form of loans,
extensions of credit, investments or purchases of assets. These transfers by
MBB to Marlin Business Services Corp. or any other
single affiliate are limited in amount to 10% of MBB’s
capital and surplus, and transfers to all affiliates are limited
in the aggregate to
20% of MBB’s capital and surplus.
These loans and extensions of credit are also subject to various collateral
requirements. These
regulations also require generally that MBB’s
transactions with its affiliates be on terms no
less favorable to MBB than comparable
transactions with unrelated third parties.
Subject to certain exceptions, the Change in Bank Control Act of 1978,
as amended, prohibits a person or group of persons from
acquiring "control" of a bank holding company unless the FDIC has been
notified 60 days prior to such acquisition and has not
objected to the transaction. Under a rebuttable presumption
in the Change in Bank Control Act, the acquisition of 10% or more of a
class of voting stock of a bank holding company with a class of securities registered
under Section 12 of the 1934 Act, such as the
Company, would, under
the circumstances set forth in the presumption, constitute acquisition of control
of the bank holding company.
The regulations provide a procedure for challenging this rebuttable control
presumption.
Securities and Exchange Commission and The NASDAQ Global Select
Market (NASDAQ)
.
We are also subject
to regulations promulgated by the Securities and Exchange Commission
and certain state securities commissions
for matters relating to the offering and sale of our securities. We
are subject to the disclosure and regulatory requirements of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended, as administered by the Securities and
Exchange Commission. We
are listed on NASDAQ under the trading symbol “MRLN,” and we are
subject to the rules of NASDAQ
for listed companies.
Other Regulations.
Although most states do not directly regulate the commercial equipment
financing business, certain states require lenders and finance
companies to be licensed, impose limitations on certain contract terms and
on interest rates and other charges, mandate disclosure of
certain contract terms and constrain collection practices and remedies.
In addition to state licensing requirements, we are required to comply with
various laws and requirements that protect credit applicants
or are otherwise applicable to financial institutions, including
but not limited to the following:
●
Gramm-Leach-Bliley Act, which requires financial institutions to maintain
privacy regarding credit application data in our
possession and to periodically communicate with certain customers
on privacy matters;
●
USA Patriot Act of 2001, which requires financial institutions, including our banking
subsidiary, to assist in the prevention,
detection and prosecution of money laundering and the financing of terrorism;
●
Telephone
Consumer Protection Act of 1991, which protects from unwanted auto-dialed or pre
-recorded telemarketing calls;
●
Fair and Accurate Credit Transactions Act (“FACT
Act”), which requires financial institutions to establish a written
program
to implement “Red Flag Guidelines,” which are intended to detect,
prevent and mitigate identity theft. The FACT
Act also
provides guidance regarding reasonable policies and procedures that a user
of consumer credit reports must employ when a
consumer reporting agency sends the user a notice of address discrepancy;
-14-
●
Fair Credit Reporting Act, which regulates the use and reporting of information
related to the credit history of certain credit
applicants;
and
●
Equal Credit Opportunity Act and Regulation B, which prohibit discrimination
on the basis of age, race and certain other
characteristics in the extension of credit and require that we provide notice to credit
applicants of their right to receive a
written statement of reasons for declined credit applications.
Our insurance operations are subject to various
types of governmental regulation. Our wholly-owned insurance company subsidiary,
AssuranceOne, is a Class 3 Bermuda insurance company and, as such, is subject
to the Bermuda Insurance Act 1978, as amended, and
related regulations.
Seasonality
The products and services we provide to our customers include loans and leases for
the acquisition of commercial equipment and
working capital loans.
Our business activities are not seasonal in nature.
Human Capital
We believe our
success depends on the strength of our workforce. The Chief Human Resources
Officer ("CHRO") is responsible for
developing and executing our human capital strategy.
This includes the acquisition, development, and retention of talent to deliver on
the Company’s strategy as well as the design
of employee compensation and benefits programs.
We recognize
that attracting,
motivating and retaining talent at all levels is vital to continuing our success.
We offer
industry competitive wages and benefits and
are committed to maintaining a workplace environment that promotes
employee productivity and satisfaction.
We manage
the business through establishing operational and financial goals that are
focused on achieving our organization-wide
initiatives.
Those goals are focused for the leadership of each department, and then
cascaded through the levels of the organization.
Like many companies, the COVID-19 pandemic has been especially challenging
as we focused our health and safety efforts on
protecting our employees and families from potential virus exposure
while continuing to maintain our operations and support our
customers. Since the beginning of the pandemic, our employees have been
working remotely, and we have
not experienced any
significant interruptions to our operations from that transition.
As of December 31, 2020, we employed 254 people. None of our employees are
covered by a collective bargaining agreement and
we
have never experienced any work stoppages.
Available Information
We are a Pennsylvania
corporation with our principal executive offices located
at 300 Fellowship Road, Mount Laurel, NJ 08054. Our
telephone number is (888) 479-9111
and our website address is www.marlincapitalsolutions
.com.
We make available
free of charge
through the investor relations section of our website our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed
with or furnished to the Securities and Exchange Commission. The
SEC also maintains a website at www.sec.gov
that contains our
reports, proxy and information statements, and other information that we
electronically file with the SEC. We
include the above
website addresses in this Annual Report on Form 10-K only as inactive textual
references
and do not intend them to be active links
to
such websites.
-15-
Item 1A.
Risk Factors
Set forth below and elsewhere in this report and in other documents we file with
the Securities and Exchange Commission are risks
and uncertainties, not limited to the risks set forth below,
that could cause our actual results to differ materially from the results
contemplated by the forward-looking statements contained
in this report and other periodic statements we make.
COVID-19 Related
The ongoing COVID-19 pandemic and measures intended to prevent its spread
could have a material adverse effect on our
business, results of operations and financial condition, and such effects
will depend on future developments, which are highly
uncertain and are difficult to predict.
Global health concerns relating to the COVID-19 pandemic and related
government actions taken to reduce the spread of the virus
have been weighing on the macroeconomic environment, and the outbreak
has significantly increased
economic uncertainty and
reduced economic activity.
The pandemic has resulted in authorities implementing numerous measures
to try to contain the virus, such
as travel bans and restrictions, quarantines, shelter in place or total lock
-down orders and business limitations and shutdowns. Such
measures have significantly contributed to rising unemployment
and negatively impacted consumer and business spending. The
United States government has taken steps to attempt to mitigate some of
the more severe anticipated economic effects of the virus,
including the passage of the Coronavirus Aid, Relief, and Economic
Security Act (“CARES Act”), but there can be no assurance that
such steps will be effective or achieve their desired results in
a timely fashion.
We continue to monitor
and evaluate newly enacted
and proposed government and banking regulations issued in response
to the COVID-19 pandemic; further changes in regulation that
impact our business or that impact our customers could have a significant
impact on our future operations and business strategies.
Our operations and financial results have already been negatively
impacted as a result of COVID-19 pandemic, as discussed further in
“Part II – Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations
—Overview” and “—
Results of Operations”.
The pandemic, reduction in economic activity,
and current business limitations and shutdowns have increased
risks to our business that include, but are not limited to:
●
Portfolio Risk.
December 31, 2020 as a result of the COVID-19 pandemic, and we have limited
visibility to the future recovery of such demand.
Our origination volumes for the year ended December 31, 2020 was $367.1 million
,
a 54% decrease from $801.9 million for the
year ended December 31, 2019.
We have shifted
the focus of portions of our operations and certain personnel to implement specific
programs and new products in
response to the pandemic.
In particular, we have focused efforts on
loan modifications and a payment deferral program,
implemented a new PPP loan product, and increased customer service
efforts to respond to our borrower’s needs.
We modified
over 5,600 contracts as part of our payment deferral program, representing
$111.2 million, or
12.8% of our Net investment in
leases and loans as of December 31, 2020.
While 92% of the modified contracts are out of the deferral period at year end, as part
of our loss mitigation strategies we are further extending the deferral
period for select customers in industries that are suffering
prolonged impacts of COVID-19.
There can be no assurances that our efforts will be successful in mitigating
any risk of credit
loss.
●
Credit Risk.
We extend credit primarily
to small and mid-sized businesses, and many of our customers may be particularly
susceptible to business limitations, shutdowns and possible recessions and
may be unable to make scheduled lease or loan
payments during these periods and may be at risk of discontinuing
their operations.
As a result, our delinquencies and credit
losses may substantially increase.
Our risk and exposure to future losses may be amplified to the extent
economic activity
remains shutdown for an extended period, or to the extent businesses have limited
operations or are unable to return to normal
levels of activity after the restrictions are lifted.
Our estimate of expected future credit losses recognized within our
allowance as of December 31, 2020 is based on certain
assumptions, forecasts and estimates about the impact of current economic
conditions on our portfolio of receivables based on
information known as of that date, including certain expectations about
the extent and timing of impacts from COVID-19.
If
those assumptions, forecasts or estimates underlying our financial statements are
incorrect, we may experience significant losses
as the ultimate realization of value, or revisions to our estimates, may
be materially different than the amounts reflected in our
consolidated statement of financial position as of any particular date.
-16-
●
Liquidity and Capital Risk.
excess of all regulatory requirements.
While we currently have sufficient capital, our reported and
regulatory capital ratios could
be adversely impacted by further credit losses and other COVID-19
related impacts on our operations.
We are managing the
evolving risks of our business while closely monitoring and forecasting the
potential impacts of COVID-19 on our future
operations and financial position, including capital levels.
However, given the uncertainty about
future developments and the
extent and duration of the impacts of COVID-19 on our business and
future operations, we face elevated risks to our ability to
forecast and estimate future capital levels.
If we fail to meet capital requirements in the future, our business, financial
condition
or results of operations may be adversely affected.
Our capital markets sale and syndication activities provide a source of liquidity
and have enabled us to manage the size and
composition of leases and loans on our balance sheet.
For the year ended December 31, 2020, we sold $28.3 million of assets that
generated a net pre-tax gain on sale of $2.4 million.
In comparison, for the year ended December 31, 2019, we sold $310.4
million of assets for pre-tax gain on sale of $22.2 million.
Disruptions in the capital markets due to the impact of COVID-19
pandemic on the economic environment resulted in a lack of demand
in the syndication
market since the end of the first quarter of
2020 and we retained substantially all of our origination volume on our balance
sheet.
Our sales execution decisions, including
the timing, volume and frequency of such sales, depend on many factors including
our origination volumes, the characteristics of
our contracts versus market requirements, our current assessment of our balance
sheet composition and capital levels, and current
market conditions, among other factors.
Driven by the continued market disruptions resulting from the COVID-19 pandemic,
we
may have difficulty accessing the capital market
and may find decreased interest and ability of counterparties to purchase our
contracts, or we may be unable to negotiate terms acceptable to us.
We have historically
returned capital to shareholders through normal dividends, special dividends
and share repurchases. There
can be no assurances that these forms of capital returns are the optimal use of our capital
or that they will continue in the future.
●
Operational Risk.
business continuity plans, and developing work from home and social
distancing plans for our employees), and we may take
further actions as may be required by government authorities or as we
determine are in the best interests of our employees,
customers and business partners.
We face increased
risk of any operational or procedural failures due to changes in our normal
business practices necessitated by the pandemic.
These factors may remain prevalent for a significant period of time
and may continue to adversely affect our business, results of
operations and financial condition even after the COVID-19 pandemic
has subsided.
The extent to which the coronavirus pandemic impacts our business, results of operations
and financial condition will depend on
future developments, which are highly uncertain and are difficult
to predict, including, but not limited to, the duration and spread of
the outbreak, its severity,
the actions to contain the virus or treat its impact, and how quickly and to what exten
t
normal economic and
operating conditions can resume. Even after the COVID-19 pandemic
has subsided, we may continue to experience materially adverse
impacts to our business as a result of the virus’s
global economic impact, including the availability of credit, adverse impacts on
our
liquidity and any recession that has occurred or may occur in the future.
There are no comparable recent events that provide guidance as to the effect
the spread of COVID-19 as a global pandemic may have,
and, as a result, the ultimate impact of the outbreak is highly uncertain
and subject to change. We
do not yet know the full extent of
the impacts on our business, our operations or the global economy
as a whole. However, the effects could have
a material impact on
our results of operations and heighten many of our known risks described herein.
Regulations
Government regulation significantly affects our business.
Further changes in regulations that impact our business may have
a
significant impact on our business, results of operations, and financial
condition.
The banking industry is heavily regulated, and such regulations are
intended primarily for the protection of depositors and the federal
deposit insurance
funds, not shareholders. Since becoming a bank holding company on
January 13, 2009, we have been subject to
regulation by the Federal Reserve Board and the Federal Reserve Bank of Philadelphia
and subject to the Bank Holding Company
Act. Our bank subsidiary,
MBB, is also subject to regulation by the Federal Reserve Board, the Federal Reserve Board of San
Francisco, and the Utah Department of Financial Institutions.
Such regulation affects lending practices, capital structure, investment
practices, dividend policy and growth.
-17-
The financial crisis of 2008 and 2009 resulted in U.S. government and regulatory
agencies placing increased focus and scrutiny on the
financial services industry,
which have subjected financial institutions to additional restrictions,
oversight and costs. In particular, the
Dodd-Frank Act substantially increased regulation of the financial
services industry,
changed deposit insurance provisions, and
impacted the ability of firms within the industry to conduct business consistent
with historical practices, including in the areas of
compensation, interest rates, financial product offerings
and disclosures, among other things.
New proposals for legislation continue
to be introduced in Congress that could further substantially increase regulation
of the financial services industry and impose
restrictions on the operations and general ability of firms within the
industry to conduct business consistent with historical practices,
including in the areas of compensation, interest rates and financial product
offerings and disclosures, among other things. Federal and
state regulatory agencies also frequently adopt changes to their reg
ulations or change the manner in which existing regulations are
applied. Such proposed changes in laws, regulations and regulatory
practices affecting the banking industry or affecting
the equipment
financing, telemarketing and collecting processes, may
limit the manner in which we conduct our business. Such changes may
adversely affect us, including our ability to execute our
strategies, and originate loans and leases, and may also result in the imposition
of additional costs on us.
We, like other
finance companies, face the risk of litigation, including class action litigation, and regulatory
investigations and actions
in connection with our business activities. These matters may be difficult
to assess or quantify, and
their magnitude may remain
unknown for substantial periods of time. A substantial legal liability or
a significant regulatory action against us could cause us to
suffer significant costs and expenses and could require us
to alter our business strategy and the manner in which we operate our
business.
Monetary policies and regulations of the Federal Reserve Board could
adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions,
our earnings and growth are affected by the policies of the Federal
Reserve Board.
An important function of the Federal Reserve Board is to regulate the money supply
and credit conditions.
Among
the instruments used by the Federal Reserve Board to implement these objectives
are open market operations in U.S. government
securities, adjustments of the discount rate and changes in reserve requirements
against bank deposits.
These instruments are used in
varying combinations to influence overall economic growth and the distribution
of credit, bank loans, investments and deposits.
Their
use also affects interest rates charged on
loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve Board
have had a significant effect on the operating results of bank
holding companies in the past and are expected to continue to do so in the future.
The effects of such policies upon our business,
financial condition and results of operations cannot be predicted.
Further increase in the FDIC deposit insurance premium or required reserves may
have a significant financial impact on us.
The FDIC insures deposits at FDIC-insured financial institutions up
to certain limits and charges insured financial institutions
premiums to maintain the Deposit Insurance Fund (DIF).
In the event of a bank failure, the FDIC takes control of a failed bank and
ensures payment of deposits up to insured limits using the resources of
the DIF. The FDIC is required
by law to maintain adequate
funding of the DIF,
and the FDIC may increase premium assessments to maintain such funding.
The Dodd-Frank Act required the FDIC to increase the DIF’s
reserves against future losses, which will necessitate increased deposit
insurance premiums that are to be borne primarily by institutions with assets of greater
than $10 billion.
Future increases in insurance
premiums may decrease our earnings and could require us to alter our business strategy
and the manner in which we operate our
business.
The total risk-based capital ratio that MBB is required to maintain is currently
set forth in the FDIC Agreement entered into in
conjunction with the opening of the bank, as discussed further in –Item 7,
Liquidity and Capital Resources–Bank Capital and
Regulatory Oversight.
We could become subject
to more stringent capital requirements, and such requirements could, among
other
things, result in lower returns
on equity, could limit our
ability to make distributions to shareholders, require the raising of additional
capital, require us to significantly change our funding strategies or operations,
and could result in regulatory actions if we were to be
unable to comply with such requirements.
-18-
Liquidity and Capital Resources
We are reliant on debt
financing to operate our business.
If we cannot issue deposits or obtain other suitable sources of financing,
we may be unable to fund our
operations.
Furthermore, if the cost of debt financing increases, we may not be able to increase the
associated pricing of our leases and loans, which could adversely impact our results of
operations, cash flows and financial
position
Our business requires a substantial amount of cash to operate. Our cash
requirements will increase as our lease and loan originations
increase. We obtain
a substantial amount of the cash required for operations through a variety of external
funding sources, such as
deposits raised by MBB, long-term note securitizations and capital markets
activities including sales and syndications of leases and
loans. A failure to access the deposits market or to add new funding facilities could
affect our ability to fund and originate new leases
and loans.
Our ability to obtain continued access to the deposits market or to obtain
a renewal of our lender’s commitment and new funding
facilities is affected by a number of factors, including:
•
conditions in the market for FDIC-insured deposits;
•
restrictions and costs associated with banking industry regulation which
could negatively impact MBB;
•
conditions in the long-term lending markets; and
•
our ability to service the leases and loans.
We are and
will continue to be dependent upon these funding sources to continue to originate leases and
loans and to satisfy our other
working capital needs. We
may be unable to obtain additional financing on acceptable terms, or at all, as a result
of prevailing interest
rates or other factors at the time, including the presence of covenants or other
restrictions under existing financing arrangements. If
any or all of our funding sources become unavailable on acceptable terms or
at all, we may not have access to the financing necessary
to conduct our business, which would limit our ability to fund our operations.
In the event we seek to obtain equity financing, our
shareholders may experience dilution as a result of the issuance of
additional equity securities. This dilution may be significant
depending upon the amount of equity securities that we issue and the prices at which
we issue such securities.
We rely on the sale of finance
receivables to third parties in the capital markets as an important source of our liquidity.
If such
arrangements become unavailable to us, we may be unable to find replacement
financing on economically viable terms, if at all.
Our capital markets sale and syndication activities provide a source of liquidity
and have enabled us to manage the size and
composition of leases and loans on our balance sheet.
Our ability to continue to execute syndications is affected
by a number of
factors, including:
•
our ability to originate assets with characteristics that meet market demand;
•
the interest and ability of counterparties to purchase our contracts, and
our ability to maintain relationships with such
counterparties;
•
current market conditions, including interest rate levels; and
•
our ability to negotiate terms acceptable to us.
For the year ended December 31, 2020,
we sold $28.3 million of assets that generated a net pre-tax gain on sale of $2.
4
million.
In
comparison, for the year ended December 31, 2019, we sold $310.4
million of assets for pre-tax gain on sale of $22.2 million.
Disruptions in the capital markets due to the impact of COVID-19 pandemic
on the economic environment resulted in a lack of
demand in the syndication market since the end of the first quarter of 2020
and we retained substantially all of our origination volume
on our balance sheet.
Driven by the continued market disruptions resulting from the COVID-19
pandemic, we may have difficulty
accessing the capital market and may find decreased interest and ability of
counterparties to purchase our contracts, or we may be
unable to negotiate terms acceptable to us.
Any disruption in our ability to access the syndication market due to COVID-19 pandemic,
or any other market disruptions, could negatively affect
our revenues, and may have an adverse effect on our results of
operations and
cash flows.
-19-
In addition, if we fail to originate assets with suitable characteristics to satisfy market
requirements, or if our counterparties’
underwriting criteria or interest in acquiring our contracts declines, we may
be unable to find replacement funding sources for these
assets.
The execution of syndications that are accounted for as sales result in the derecognition
of the assets, and the recognition of a gain (or
loss) on the sale date, to the extent the proceeds received are in excess of the
value of the transferred assets and/or any liability
incurred.
We may have continuing
involvement in the contracts sold to syndication through servicing the contracts sold,
and/or
through any recourse obligations that may include customary representations
and warranties or specific recourse provisions.
We
generally do not retain credit risk on loans sold, but we are exposed to risk
to the extent that we violate such representations and
warranties, and we may be required to repurchase loans and leases, which
could impact our cashflows and ability to fund our
operations.
We are subject to regulatory
capital adequacy guidelines, and if we fail to meet these guidelines, our business, financial
condition
or results of operations may be adversely affected.
We may be required to raise additional
capital in the future, but that capital may
not be available when it is needed.
Under regulatory capital adequacy guidelines, and other regulatory
requirements, we must meet guidelines that include quantitative
measures of assets, liabilities and certain off-balance
sheet items, subject to qualitative judgments by regulators regarding components,
risk weightings and other factors. If we fail to meet these minimum
capital guidelines and other regulatory requirements, our business,
financial condition or results of operations may be adversely affected.
In addition, if we fail to maintain “well-capitalized” status
under the regulatory framework, if we are deemed to be not well-managed
under regulatory exam procedures or if we experience
certain regulatory violations, our status as a financial holding company,
our related eligibility for a streamlined review process for
acquisition proposals and our ability to offer certain financial
products may be compromised or impaired.
We may require
additional capital to fund our operations, driven by changes in required regulatory
capital levels, changes in the
availability of our funding sources, changes in our business strategies, and
changes in market conditions, among other factors.
As a
result, we may need to suspend or discontinue our share repurchase
program or any practice of declaring regular quarterly dividends
in
order to retain more capital on our Balance sheets.
In addition, we may at some point need to raise additional capital to support our
operations.
Our ability to raise additional capital will depend, in part, on conditions in the capital markets
at that time, which are
outside our control, and on our financial performance. Accordingly,
we may be unable to raise additional capital, if and when needed,
on terms acceptable to us, or at all. If we cannot raise additional capital when needed,
we may become subject to adverse regulatory
actions or restrictions, and limitations on growth of our operations.
In addition, if we decide to raise additional equity capital, our
shareholders’ interests in us could be diluted.
For further information on our required capital levels, see “–Item 1.
Business. Supervision and Regulation” and see “–Item 7.
Liquidity and Capital Resources. Bank Capital and Regulatory Oversight”
in this Form 10-K.
If interest rates change significantly, we may be
subject to higher interest costs with respect to our funding sources, which may
cause us to suffer material
losses.
Because we use FDIC insured deposits to fund our leases, our margins could
be reduced by an increase in interest rates. Each of our
leases is structured so that the sum of all scheduled lease payments will equal
the cost of the equipment to us, less the residual, plus a
return on the amount of our investment. Generally our leases and loans are
fixed-rate in nature.
When we originate or acquire leases,
we base our pricing in part on the spread we expect to achieve between the yield on
each lease and the effective interest rate we expect
to pay when we finance the lease. To
the extent that a lease is financed with variable-rate funding from deposits or
borrowings,
increases in interest rates during the term of a lease could narrow or eliminate
the spread, or result in a negative spread.
A negative
spread is an interest cost greater than the yield on the lease. If interest rates increase
faster than we are able to adjust the pricing under
our new leases or loans, our net interest margin would be reduced.
In addition, with respect to our fixed-rate deposits and borrowings,
increases in interest rates could have the effect of increasing
our costs on future transactions.
-20-
Credit and Portfolio Risk
If we inaccurately assess the creditworthiness of our small business customers,
we may
experience a higher number of lease and
loan defaults, which may restrict our access to funding and reduce our earnings.
We specialize in leasing
and financing equipment and providing working capital to small and mid
-sized businesses. Small and mid-
sized businesses may be more vulnerable than large
businesses to economic downturns, as they typically depend on the management
talents and efforts of one person or a small group of persons and
often need substantial additional capital to expand or compete. Small
and mid-sized business leases and loans, therefore, may entail a greater
risk of delinquencies and defaults than leases and loans
entered
into with larger leasing customers. In addition, there is typically only
limited publicly available financial and other information
about small and mid-sized businesses and they often do not have
audited financial statements. Accordingly,
in making credit
decisions, our underwriting guidelines rely upon the accuracy of information
about these small and mid-sized businesses obtained
from the small and mid-sized business owner and/or third-party sources,
such as credit reporting agencies. If the information we
obtain from small and mid-sized business owners and/or third-party
sources is incorrect or fraudulent, our ability to make appropriate
credit decisions will be impaired. If we inaccurately assess the creditworthiness
of our small business customers, we may experience a
higher number of lease and loan defaults and related decreases in our
earnings.
We rely on information
provided by our customers and vendors.
If the information that we rely upon is not accurate, or if it was
provided with fraudulent or malicious intent, we may not make
appropriate credit decisions and our financial position, operating
results and reputation may be negatively impacted.
Customer and vendor fraud have always been risks inherent to the equipment
finance business. We have
taken measures to detect and
reduce the risk of fraud, including the implementation of new antifraud
tools, increased vendor surveillance staff and enhancements
to
procedures, but these measures need to be continually improved and may not
be effective against new and continually evolving forms
of fraud. If we experience increases in fraudulent activity,
or if our anti-fraud measures are not effective, we could experience
an
increase in the level of our fraud charge-offs,
adversely affecting the results of operations.
This could also lead to increased regulatory
scrutiny, which
could adversely affect our brand and reputation.
These impacts, as well as the implementation of any necessary
measures to reduce fraud risk could increase our costs and adversely impact
our results of operations.
If we cannot maintain
our relationships with origination partners and our existing customers our ability
to
generate lease and loan
transactions and related revenues may be significantly
impeded.
We have formed
relationships with thousands of origination partners, comprised primarily
of independent equipment dealers. We
rely
on these relationships to generate lease and loan applications and
originations. Most of these relationships are not formalized in
written agreements, and those that are formalized by written agreements
are typically terminable at will. Our typical relationship does
not commit the origination partner to provide a minimum number of lease and
loan transactions to us nor does it require the
origination partner to direct all of its lease and loan transactions to us. The
decision by a significant number of our origination partners
to refer their leasing transactions to another company could impede our
ability to generate lease and loan transactions and related
revenues.
Customer complaints or negative publicity could result in a decline in our customer
growth and our business could suffer
.
Our reputation is important to attract new customers as well as to obtain repeat
business from existing customers. There can be no
assurance that we will continue to maintain a good relationship with our customers
or avoid negative publicity.
Any damage to our
reputation, whether arising from our conduct of business, negative publicity,
regulatory, supervisory
or enforcement actions, matters
affecting our financial reporting or compliance with Securities and
Exchange Commission and NASDAQ listing requirements,
security breaches or otherwise could have a material adverse effect
on our business.
-21-
Risks Related to our Operations
If we are unable to effectively execute our business strategy,
we may suffer material
operating losses.
Our financial position, liquidity and results of operations depend
on management’s ability to execute our
business strategies.
Our
objective to transition from a micro-ticket equipment lessor into a nationwide
provider of capital solutions to small businesses,
includes the following priorities:
a focus on strategically expanding our target market; better leveraging
our capital and fixed cost
base through origination and portfolio growth, improving our operating
efficiency,
and proactively managing our risk profile.
The economic fallout from the pandemic caused a reduction in demand
for financing in our target market.
The tightening of our
underwriting standards and the re-organization of
our origination platform caused further pressure on our origination activities in the
wake of the pandemic.
Executing the expansion of our target market and growth of our or
iginations and portfolio depends on a
number of factors,
including executing the acceleration of our automation and digital
initiatives, achieving the desired volume of
leases and loans of suitable yield and credit quality,
effectively managing those leases and loans, obtaining appropriate
funding, the
competitive environment, and changes to our industry,
market and general economic conditions.
Accomplishing such a result on a
cost-effective basis is largely a function of our
marketing capabilities, our management of the leasing process, our credit underwriting
guidelines, our ability to provide competent, attentive and efficient
servicing to our origination partners and our small business
customers, our ability to execute effective credit risk management
and collection techniques, our access to financing sources on
acceptable terms, our ability to create an automated customer experience through
our accelerated digital initiative and our ability to
attract and retain high quality employees in all areas of our business.
There can be no assurances that we will be successful in our
growth and expansion strategies, or that such measures will improve our
operating efficiency,
or that such measures will improve our
operating results, cashflows or financial position.
To proactively
manage our risk profile, we continually monitor and analyze the performance of
our portfolio, assess our delinquency
and credit loss experience against our underwriting criteria and determine
whether our performance is commensurate with our
intended risk tolerance.
We may make adjustments
in response to such analysis to tighten or loosen our underwriting criteria, or
to
adjust borrower guarantee requirements, among other measures.
For example, in 2020 we made continual adjustments based on our
assessments of the appropriate risk profile for different
geographies and industries based on the changing economic climate driven by
the COVID-19 pandemic.
Any such changes to our risk profile may not have the intended outcome on our portfolio’s
performance,
and our results of operations, cashflows, and financial position.
To the extent that we tighten our standards,
we risk not being not
competitive in the market and losing origination volume.
To the extent that we loosen our standards,
we risk incurring credit losses in
excess of our expectations.
As part of our growth and market expansion strategies, we may evaluate
opportunities for business combinations from time to time.
We completed
the acquisitions of Horizon Keystone Financial in January 2017, and Fleet Financing
Resources in September 2018, as
part of our strategies to grow through acquisitions that extend our business into
new and attractive markets.
Any such business
combinations entail numerous risks, including risks related to:
(i) integrating the acquired operations, services and products;
(ii)
achieving expected synergies, including infrastructure
costs; (iii) acquisition-related costs or amortization cost for acquired intangible
assets, that could impact our operating results;
(iv) retention of customer and supplier relationships of the acquired business; (v)
diverting management attention from our ongoing business; and (vi) potentially
negatively impacting our ability to attract, retain and
motivate key personnel.
We may not realize
the anticipated benefits of past or future investments or acquisitions, and
integration of
acquisitions may disrupt our business and management.
There can be no assurances that any business combinations will have the
impact that we intend on our financial position, results of operations and
cash flows.
While we assess the potential benefits that could
be realized from any acquisition, as well as the potential costs and operating losses that
could be incurred, our assessments and
estimates may differ materially from actual costs and benefits realized.
If we cannot effectively compete within the equipment leasing industry,
we may be
unable to increase our revenues or maintain
our current levels of
operations.
The business of small-ticket equipment leasing is highly fragmented
and competitive. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing resources
than we do. For example, some competitors may have a
lower cost of funds and access to funding sources that are not available to us.
A lower cost of funds could enable a competitor to offer
leases and loans with yields that are lower than those we use to price our leases and loans, potentially
forcing us to decrease our yields
or lose origination volume. In addition, certain of our
competitors may have higher risk tolerances or different risk assessments,
which
could allow them to establish more origination partner and small business customer
relationships and increase their market share. The
barriers to entry are relatively low with respect to our business and, therefore,
new competitors could enter the business of small-ticket
-22-
equipment leasing at any time. The companies that typically provide
financing for large-ticket or middle-market transactions
could
begin competing with us on small-ticket equipment leases. If this occurs,
or we are unable to compete effectively with our
competitors, we may be unable to sustain our operations at their current levels
or generate revenue growth.
Deteriorated economic or business conditions may lead to greater than anticipated
lease or loan defaults and credit losses and
lower origination volumes, which could substantially reduce our operating
income and limit our ability to obtain additional
financing.
Furthermore, natural disasters, widespread disease or pandemics
(including the recent coronavirus outbreak), acts of
war or terrorism, or other external events could significantly impact
our business
.
Historically, the capital
and credit markets have experienced periodic volatility and disruption.
In many cases, these markets have
produced downward pressure on stock prices of, and credit availability
to, certain companies without regard to those companies’
underlying financial strength. Concerns over geopolitical issues and
the availability and cost of credit, have contributed to increased
volatility for the economy and the capital and credit markets. In the event
of extreme and prolonged market events, such as a global
credit crisis, we could incur significant losses.
Even in the absence of a market downturn, we are exposed to substantial risk of
loss
due to market volatility.
Our operating income may be reduced by various economic factors
and business conditions, including the level of economic activity
in the markets in which we operate. In turn, those economic factors and business conditions
can be significantly and negatively
impacted by natural disasters, widespread disease or pandemics (including
the recent coronavirus outbreak), acts of war or terrorism or
other adverse external events, all of which can result in economic slowdowns
or recessions. Delinquencies and credit losses generally
increase during economic slowdowns or recessions. Because we extend
credit primarily to small and mid-sized businesses, many of
our customers may be particularly susceptible to economic slowdowns or recessions
and may be unable to make scheduled lease or
loan payments during these periods. Therefore, to the extent that economic
activity or business conditions deteriorate, our
delinquencies and credit losses may increase. Unfavorable economic
conditions may also make it more difficult for us to maintain
both our new lease and loan origination volume and the credit quality of new
leases and loans at levels previously attained.
Unfavorable economic conditions could also increase our funding
costs or operating cost structure or limit our access to funding. We
experienced such impacts in the year ended December 31, 2020 as a result
of macroeconomic conditions driven by the COVID-19
pandemic, which would be the primary driver of negative impacts for
2020 as compared to 2019, including $10.0 million increase in
realized credit losses, a 52% decline in equipment finance origination
volumes, a 69% decline in working capital origination volumes,
as well as reduced capital market interest in purchases of finance contracts
that, paired with our lower origination volumes,
substantially reduced our gains on sale.
Any return to levels prior to the COVID-19 pandemic, or the timing of such
return, remains
uncertain, and any prolonged impacts could continue to impact our operating
income.
In addition, any further changes to economic
and business conditions could reduce our operating income.
In addition, natural disasters, widespread disease or pandemics (including
the recent coronavirus outbreak), acts of war or terrorism or
other adverse external events could have not only a significant economic impact
as described above, but also a significant impact on
our ability to conduct business as a result of business shutdowns, regional
quarantines or otherwise.
While we have established and
regularly test disaster recovery procedures, the occurrence of any such event
could have a material adverse effect on our business and
operations.
The termination or interruption of, or a decrease in volume under,
our property
insurance program would cause us to experience
lower revenues and may result in a
significant reduction in our net income.
Our customers are required to obtain all-risk property insurance for the
replacement value of financed equipment. Each customer has
the option of either delivering a certificate of insurance listing us as loss payee
under a commercial property policy issued by a third-
party insurer or satisfying such insurance obligation through our
insurance program. Under our program, the customer pays for
coverage under a master property insurance policy written by a national
third-party insurer (our “primary insurer”) with whom our
captive insurance subsidiary,
AssuranceOne, has entered into a 100% reinsurance arrangement. Termination
or interruption of our
program could occur for a variety of reasons, including: (1) adverse changes in laws or
regulations affecting our primary insurer or
AssuranceOne; (2) a change in the financial condition or financial strength
ratings of our primary insurer or AssuranceOne;
(3) negative developments in the loss reserves or future loss experience of
AssuranceOne, which render it uneconomical for us to
continue the program; (4) termination or expiration of the reinsurance
agreement with our primary insurer, coupled with an inability
by us to identify quickly and negotiate an acceptable arrangement with a replacement
carrier; or (5) competitive factors in the property
insurance market. If there is a termination or interruption of this program
or if fewer small business customers elected to satisfy their
insurance obligations through our program, we would experience lower
revenues and our net income may be reduced.
-23-
Our financial statements are based in part on assumptions and estimates made
by our management that could vary from actual
results.
Pursuant to accounting principles generally accepted in the United
States, we utilize certain assumptions and estimates in preparing
our financial statements, including but not limited to, when accounting for income
recognition, the allowance for credit losses, the
residual values of leased equipment, deferred initial direct costs and fees, late fee
receivables, the fair value of financial instruments,
estimated losses from insurance program, and income taxes.
If the assumptions or estimates underlying our financial statements are
incorrect, we may experience significant losses as the ultimate realization
of value may be materially different than the amounts
reflected in our consolidated statement of financial position as of any particular
date.
Specific to our allowance for credit losses, in connection with our financing
activities, we record an allowance to provide for estimated
losses based on both qualitative and quantitative factors including, among
other things, past collection experience, lease and loan
delinquency data, industry data, economic conditions and our assessment of
collection risks. Significant management judgment is
required to determine the appropriate level of the allowance and,
therefore, our determination of this allowance may prove to be
inadequate to cover losses in connection with our portfolio of leases and
loans. Factors that could lead to the inadequacy of our
allowance may include our inability to manage collections effectively,
unanticipated adverse changes in the economy or discrete
events adversely affecting specific leasing customers,
industries or geographic areas. Losses in excess of our allowance for credit
losses would cause us to increase our provision for credit losses, reducing
or eliminating our operating income.
On January 1, 2020,
the Company adopted the guidance of
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
measurement that was based on probable, incurred losses.
Starting in 2020, the recognized allowance estimate will include expected
credit losses over the remaining contractual term of the existing portfolio.
After the adoption of this standard, our allowance estimate
will continue to involve management’s
judgment, and assessment of various qualitative and quantitative factors,
and such estimate
will still be subject to continual update driven by similar factors outlined
above.
Specific to our estimates of residual value of equipment, we record sales-type
financing leases at the aggregate future minimum lease
payments plus the estimated residual value less unearned income.
Residual values are established on our balance sheet at lease
inception based on our estimate of the expected fair value of the equipment
at the end of the lease term.
Realization of residual values
depends on numerous factors including: the general market conditions
at the time of expiration of the lease; the customer’s election to
enter into a renewal period; the cost of comparable new equipment; the
obsolescence of the leased equipment; any unusual or
excessive wear and tear on or damage to the equipment; the effect
of any additional or amended government regulations; and the
foreclosure by a secured party of our interest in a defaulted lease. Our failure
to realize our recorded residual values would reduce the
residual value of equipment recorded as assets on our balance sheet and
may reduce our operating income.
For additional information on the key areas for which assumptions and
estimates are used in preparing our financial statements, see
“Part II—Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
—Critical Accounting
Policies and Estimates”, and see “Note 2.
Summary of Significant Accounting Policies ” in our Financial Statements for further
discussion of our accounting policies in this Form 10-K.
Technology
We are continually encountering
technological change.
If we experience significant telecommunications or technology downtime,
our
operations would be disrupted and our ability to generate operating
income could be
negatively impacted.
Our business depends in large part on our telecommunications
and information management systems, and we are increasing our
reliance on our technology platform as a result of our current digital initiative
business strategy. The temporary
or permanent loss of
our computer systems, telecommunications equipment or software systems,
through casualty or operating malfunction, could disrupt
our originations and operations and negatively impact our ability to secure
new business and to service our customers. This could lead
to significant declines in our operating income.
-24-
Furthermore, particularly given our digital strategy implemented and announced
in 2020, we are constantly undergoing rapid
technological change with frequent introductions of new technology
-driven products and services. The effective use of technology
increases efficiency and enables us to better service clients and
reduce costs. Our future success depends, in part, upon our ability to
address the needs of our clients by using technology to provide products
and services that will satisfy client demands, as well as create
additional efficiencies within our operations.
Many of our large competitors have substantially greater resources to invest in
technological improvements. We
may not be able to effectively implement new technology
-driven products and services quickly or be
successful in marketing these products and services to our clients. Failure
to successfully keep pace with technological change
affecting the financial services industry generally
and our business strategy specifically could have a material adverse impact on our
business and, in turn, our financial condition and results of operations.
A failure in or breach of our technology infrastructure or information protection
programs, or those of our outsource service
providers, could result in the inadvertent disclosure of the confidential information
of our customers and affiliates or confidential
personal information of personal guarantors of our loans and leases.
Any such failure, including as a result of cyber-attacks
against us or our outsource partners, non-compliance with our contractual or other
legal obligations regarding such information,
or a violation of the Company's privacy and security policies with respect to such
information, could adversely affect us
.
Our business model and our reputation as a service provider to our
clients are dependent upon our ability to safeguard confidential
information. Although we have put in place, and require our outsource
service providers to follow,
a comprehensive information
security program that we monitor and update as needed, security
breaches could occur through intentional or unintentional acts by
individuals having authorized or unauthorized access to confidential information
of our customers, employees or stakeholders which
could potentially compromise confidential information processed and
stored in or transmitted through our technology infrastructure.
The legal, regulatory and contractual environment surrounding
information security and privacy is constantly evolving and companies
that collect and retain such information are under increasing attack by
cyber-criminals around the world. A significant actual or
potential theft, loss, fraudulent use or misuse of customer,
stockholder, employee or our data by cybercrime
or otherwise, non-
compliance with our contractual or other legal obligations regarding such
data or a violation of our privacy and security policies with
respect to such data could adversely impact our reputation and could result
in significant costs, fines, litigation or regulatory action
against us. Increasingly,
our products and services are accessed through the Internet, and security breaches
in connection with the
delivery of our services via the Internet may affect us and
could be detrimental to our reputation, business, operating results and
financial condition.
We cannot be certain
that advances in criminal capabilities, new discoveries in the field of cryptography
or other
developments will not compromise or breach the technology protecting
the networks that access our products and services.
Risks Related to our Stock
Our common stock price is volatile.
The trading price of our common stock may fluctuate substantially depending
on many factors, some of which are beyond our control
and may not be related to our operating performance. These fluctuations
could cause investors to lose part or all of their investment in
our shares of common stock. Those factors that could cause fluctuations
include, but are not limited to, the following:
•
price
and
volume
fluctuations
in
the
overall
stock
market
from
time
to
time;
•
s
ignificant
volatility
in
the
market
price
and
trading
volume
of
financial
services
companies
or
in
the
trading
volume
of
our
common stock in particular;
•
actual
or
anticipated
changes
in
our
earnings
or
fluctuations
in
our
operating
results
or
in
the
expectations
of
market
analysts;
•
investor
perceptions
of
the
equipment
leasing
industry
in
general
and
the
Company
in
particular;
•
the
operating
and
stock
performance
of
comparable
companies;
•
legislative
and
regulatory
changes
with
respect
to
the
financial
or
banking
industries;
•
general
economic
conditions
and
trends
,
including
but
not
limited
to
those
resulting
from
the
COVID
-
19
pandemic;
•
major
catastro
phic
events;
-25-
•
loss
of
external
funding
sources;
•
sales
of
large
blocks
of
our
stock
or
sales
by
insiders;
or
•
departure
s
of
key
personnel.
It is possible that in some future quarter our operating results may be below
the expectations of financial market analysts and investors
and, as a result of these and other factors, the price of our common stock may
decline.
We have historically returned
capital to shareholders through normal dividends, special dividends and
share repurchases.
There
can be no assurances that these forms of capital returns are the optimal
use of our capital or that they will continue into the future.
During 2019, our Board of Directors authorized an updated share repurchase
program under which we repurchased 264,470 shares of
our common stock in the year ended December 31, 2020 and at December
31, 2020 had $4.7 million remaining authorizations under
that 2019 repurchase program. We
have no obligation to repurchase shares under this authorization,
and any share repurchase program
may be extended, modified, suspended or discontinued at any time.
Any such repurchases reduce our market capitalization and public
float, which is the number of shares of our common stock that are
owned by non-affiliated stockholders and available for
trading in the securities markets, which may reduce the volume of trading in
our shares and result in reduced liquidity and volatility in our stock price.
The market price of our common stock has been and may
continue to be volatile which may affect your ability to
sell our common stock at an advantageous price. For example, the closing
market price of our common stock on the NASDAQ fluctuated between
$6.02 per share and $22.01 per share during 2020 and may
continue to fluctuate.
Market price fluctuations in our common stock may be due to factors both within
and outside of our control,
including our strategic actions, industry and regulatory matters or other
material public announcements, as well as a variety of
additional factors including, without limitation, those set forth under
these “Risk Factors” and "Cautionary Note Regarding Forward-
Looking Statements."
Any repurchases would utilize cash that we will not be able to use in other
ways, or to meet other potential demands, and may not
prove to be the best use of our capital. There can be no assurance that we will repurchase
any, or the full amount authorized
under any
share repurchase program, or that any past or future repurchases will have a positive
impact on our stock price.
Future sales of our Common Stock by our significant shareholders may
depress our stock price or impair our ability to raise funds
in new share offerings.
Our existing shareholders may be able to exert significant influence over matters
requiring shareholder
approval and over our management.
A small number of shareholders own a substantial amount of our Common
Stock.
As of December 31, 2020, our top 5 largest
shareholders beneficially own 55% of our common stock. The market
price of our common stock could be adversely affected as a
result of sales of a large number of our common stock shares in the market,
or the perception that these sales could occur.
These sales,
or the possibility that these sales might occur,
also might make it more difficult for us to sell equity securities in the
future at a time
and at a price that we deem attractive.
These shareholders, if acting together,
would be in a position to significantly influence the election of our directors
and the vote on
certain corporate transactions, including mergers
and other business combinations.
This concentrated ownership could limit other
stockholders’ ability to influence corporate matters.
This may result in our taking corporate actions that other shareholders may
not
consider to be in their best interest and may affect the price of
our Common Stock.
Anti-takeover provisions and our right to issue preferred stock
could make a
third-party acquisition of us difficult.
We are a Pennsylvania
corporation. Anti-takeover provisions of Pennsylvania law could make
it more difficult for a third party to
acquire control of us, even if such change in control would be beneficial to our
shareholders. Our amended and restated articles of
incorporation and our bylaws contain certain other provisions that would
make it difficult for a third party to acquire control of us,
including a provision that our Board of Directors may issue preferred
stock without shareholder approval.
Item 1B.
Unresolved Staff Comments
None.
-26-
Item 2.
Properties
At December 31,
2020,
we operated from three leased facilities including our executive office facility,
a branch office and the
headquarters of MBB. Our Mount Laurel, New Jersey executive offices
are housed in a leased facility of approximately 50,000 square
feet under a lease that expires in May 2032.
The headquarters of MBB in Salt Lake City, Utah
is 4,399 square feet and the lease
expires in December 2021. We
also lease office space for our branch office in
Philadelphia,
Pennsylvania.
We believe our
leased facilities are adequate for our current needs and sufficient to
support our current operations and anticipated
future requirements.
See Note 11 – Leases, in the accompanying Notes
to Consolidated Financial Statements for additional information.
Item 3.
Legal Proceedings
We are party
to various legal proceedings, which include claims and litigation arising
in the ordinary course of business. In the
opinion of management, these actions will not have a material effect
on our business, financial condition or results of operations or
cash flows.
Item 4.
Mine Safety Disclosures
Not applicable.
-27-
PART
II
Item 5.
Market for Registrant’s Common
Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Marlin Business Services Corp. completed its IPO of common
stock and became a publicly traded company on November 12, 2003.
The Company’s common
stock trades on the NASDAQ Global Select Market under the symbol “MRLN.”
Dividend Policy
On October 29, 2020, Marlin Business Services Corp. declared
its thirty-seventh regular quarterly dividend. The dividend of $0.14
per
share of common stock was paid on November 19, 2020 to holders of our common
stock as of November 9, 2020.
The Federal Reserve Board has issued policy statements which provide
that, as a general matter, insured banks and bank holding
companies should pay dividends only out of current operating earnings. Payment
of dividends by MBB to its sole shareholder,
Marlin
Business Services Corp., are also subject to the regulatory requirements
and restrictions described in the “Supervision and Regulation”
portion of Item 1 of Part I of this Form 10-K.
Payment of future dividends
will also depend upon our earnings, financial condition, capital requirements,
cash flow, long-range plans
and such other factors as our Board of Directors may deem relevant.
Number of Record Holders
There were 121 holders of record of our common stock at February 26, 2021
.
We believe that the number
of beneficial owners is
greater than the number of record holders because a large
portion of our common stock is held of record through brokerage firms in
“street name.”
Information on Stock Repurchases
On August 1, 2019, the Company’s
Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under
which
the Company is authorized to repurchase up to $10 million in value of its outstanding
shares of common stock.
There is no stated
expiration date for the authorizations under this plan.
The Company did not repurchase any shares of its common stock during
the fourth quarter of 2020 and the maximum dollar value of
shares that may yet be purchased under the 2019 Repurchase Plan is $4,491,747.
Remaining authorizations for share repurchases may be
exercised from time to time and in such amounts as market conditions
warrant. Any shares purchased under this plan are returned to the status of
authorized but unissued shares of common stock. The
repurchases may be made on the open market, in block trades or otherwise.
Any stock repurchase programs do not obligate the
Company to acquire any particular amount of common stock, and
such programs may be suspended at any time at the Company's
discretion. The repurchases are funded using the Company’s
working capital.
In addition to any repurchases described above, pursuant to the Company’s
2003 Equity Compensation Plan, as amended (the “2003
Plan”) and the Company’s 2014
Equity Compensation Plan (approved by the Company’s
shareholders on June 3, 2014) (the “2014
Plan”) and the Company’s 2019
Equity Compensation Plan (approved by the Company’s
shareholders on May 30, 2019) (the “2019
Plan” and, together with the 2014 Plan and the 2003 Plan, the “Equity
Compensation Plans”), participants may have shares withheld
to cover income taxes. There were 41,821 shares repurchased to cover
income tax withholding in connection with shares granted
under the Equity Plans during the year ended December 31, 2020
at an average per-share cost of $10.69.
-28-
Shareholder Return Performance Graph
The following graph compares the dollar change in the cumulative total
shareholder return on the Company’s
common stock against
the cumulative total return of the Russell 2000 Index and the SNL Specialty
Lender Index for the period commencing on December
31, 2015 and ending on December 31, 2020. The graph shows the cumulative
investment return to shareholders based on the
assumption that a $100 investment was made on December 31,
2015 in each of the following: the Company’s
common stock, the
Russell 2000 Index and the SNL Specialty Lender Index. We
computed returns assuming the reinvestment
of all dividends. The
shareholder return shown on the following graph is not indicative of future
performance.
Period Ending
Index
12/31/15
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
Marlin Business Services Corp.
100.00
134.78
147.84
150.41
151.80
89.57
Russell 2000 Index
100.00
121.31
139.08
123.76
155.35
186.36
SNL Specialty Lender Index
100.00
113.01
134.65
114.28
155.10
155.52
-29-
Item 6.
Selected Financial Data
The following selected financial data as of and for each of the five years
ended December 31, 2020 has been derived from the
consolidated financial statements. The selected financial data should
be read together with the consolidated financial statements and
notes thereto and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” included elsewhere
in
this Form 10-K.
Year Ended December 31,
2020
(1)
2019
2018
2017
(2)
2016
(Dollars in thousands, except per-share data)
Statement of Operations Data:
Interest and fee income
$
103,359
$
122,625
$
112,868
$
102,319
$
90,252
Interest expense
19,868
25,033
17,414
11,180
7,778
83,491
97,592
95,454
91,139
82,474
Provision for credit losses
(3)
38,509
28,036
19,522
18,394
12,414
44,982
69,556
75,932
72,745
70,060
Non-Interest Income:
Gain on leases and loans sold
(4)
2,426
22,210
8,363
2,818
469
Insurance premiums and Other income
21,914
21,821
13,071
13,914
9,289
Non-Interest Income
24,340
44,031
21,434
16,732
9,758
Non-interest expense:
Salaries and benefits
33,783
44,168
39,750
37,569
31,912
General and administrative
30,914
32,566
24,915
28,272
19,523
Goodwill impairment
6,735
—
—
—
—
Intangible assets impairment
1,016
—
—
—
—
Financing related costs
—
—
—
—
85
72,448
76,734
64,665
65,841
51,520
Income before income taxes
(3,126)
36,853
32,701
23,636
28,298
Income tax (benefit) expense
(3,468)
9,737
7,721
(1,656)
11,019
$
342
$
27,116
$
24,980
$
25,292
$
17,279
Basic earnings per share
$
0.03
$
2.21
$
2.01
$
2.02
$
1.38
Diluted earnings per share
$
0.03
$
2.20
$
2.00
$
2.01
$
1.38
Cash dividends declared per share
$
0.56
$
0.56
$
0.56
$
0.56
$
0.56
-30-
Year Ended December 31,
2020
(1)
2019
2018
2017
(2)
2016
(Dollars in thousands, except per-share data)
Operating Data:
Total number of finance receivables originated
16,602
31,246
33,105
32,189
27,583
Total finance receivables originated
$
367,128
$
801,945
$
704,894
$
629,445
$
504,282
Assets sold in the period
(4)
$
28,342
$
310,415
$
138,995
$
66,744
$
18,132
Average total finance receivables
(5)
$
945,599
$
1,028,617
$
944,588
$
846,743
$
720,060
Weighted average interest rate (implicit)
(6)
10.66
%
12.86
%
12.45
%
11.98
%
11.67
%
Interest income as a percent of average
(5)
9.81
%
10.44
%
10.27
%
10.33
%
10.38
%
Interest expense as percent of average
2.20
%
2.58
%
2.02
%
1.43
%
1.20
%
Portfolio Asset Quality Data:
Total finance receivables, end of period
(5)
$
869,284
$
1,007,706
$
996,383
$
911,242
$
793,285
Delinquencies greater than 60 days past due
(7)
0.77
%
0.85
%
0.65
%
0.55
%
0.46
%
Allowance for credit losses
(3)
$
44,228
$
21,695
$
16,100
$
14,851
$
10,937
Allowance for credit losses to total finance
(5)
5.09
%
2.15
%
1.62
%
1.63
%
1.38
%
Charge-offs, net
$
32,416
$
22,441
$
18,273
$
14,480
$
9,890
Ratio of net charge-offs to average
(5)
3.43
%
2.18
%
1.93
%
1.71
%
1.37
%
Operating Ratios:
Efficiency ratio
(8)
67.19
%
54.18
%
55.32
%
61.04
%
55.77
%
Return on average total assets
0.03
%
2.18
%
2.29
%
2.59
%
2.08
%
Return on average stockholders’ equity
0.18
%
13.33
%
13.27
%
15.38
%
11.15
%
Balance Sheet Data:
Cash and cash equivalents
$
135,691
$
123,096
$
97,156
$
67,146
$
61,757
Restricted interest-earning deposits with banks
$
4,719
$
6,931
$
$14,045
$
—
$
—
Net investment in leases and loans
$
825,056
$
1,006,520
$
1,000,740
$
914,420
$
796,717
Total assets
$
1,021,998
$
1,207,443
$
1,167,046
$
1,040,160
$
892,158
Deposits
$
729,614
$
839,132
$
755,776
$
809,315
$
697,357
Long-term borrowings
$
30,665
$
76,091
$
$150,055
$
—
$
—
Total liabilities
$
825,633
$
992,487
$
968,535
$
860,511
$
729,869
Total stockholders’ equity
$
196,365
$
214,956
$
198,511
$
179,649
$
162,289
__________________________________________________________________________________________
In 2020, our business activities, origination volumes, and volumes of lease and loan sales were largely impacted by the COVID-19
pandemic.
See “—
Results of Operations” in Item 7 for discussion.
(2)
Net
income,
Income
tax
benefit,
and
certain
operation
ratios
for
2017
were
favorably
impacted
by
a
one
-
time
tax
benefit
of
$10.2
million
related
to
the
December 2017 enactment of the Tax Cuts and Jobs Act of 2017.
-31-
(3)
On January 1, 2020, the Company adopted “CECL”, which replaced the probable/ incurred loss model
that we historically used to measure our
allowance, with a measurement of expected credit losses for the contractual term of our current portfolio of
loans and leases.
The December 31, 2019
end of period allowance and % of receivables were $33,603 and 3.27% after the January 1, 2020 adoption
of CECL.
See “—Finance Receivables and
Asset Quality” in Item 7 for discussion.
(4)
See
“
—
Liquidity
and
Capital
Resources”
in
Item
7
for
discussion
of
our
sales
of
finance
receivables
and
related
trends
.
(5)
Total
finance
receivables
include
net
investment
in
sales
-
type
leases
and
loans.
For
purposes
of
as
set
quality
and
allowance
calculations
the
effects
of
(i)
the allowance for credit losses and (ii) initial direct costs and fees deferred, are excluded from total finance receivables.
(6)
Excludes
initial
direct
costs
and
fees
deferred
.
(7)
Calculat
ed
as
a
percentage
of
minimum
lease
payments
receivable
for
leases
and
as
a
percentage
of
principal
outstanding
for
loans
.
(8)
Salaries,
benefits,
general
and
administrative
expense
divided
by
net
interest
and
fee
income,
and
non
-
interest
income
.
-32-
Item 7.
Management’s Discussion and Analysis
of Financial Condition and
Results of Operations
FORWARD
-LOOKING STATEMENTS
Certain statements in this document (or made in other documents filed or furnished
with the Securities and Exchange Commission or
orally to analysts, investors, representatives of the media and others) may
include the words or phrases “can be,” “expects,” “plans,”
“may,” “may affect,”
“may depend,” “believe,” “estimate,” “intend,” “could,” “should,” “would,”
“if” and similar words and phrases
that constitute “forward-looking statements” within the meaning
of Section 27A of the Securities Act of 1933,
as amended (the “1933
Act”), Section 21E of the Securities Exchange Act of 1934, as amended
(the “1934 Act”) and the Private Securities Litigation Reform
Act of 1995.
Investors are cautioned not to place undue reliance on these forward-looking
statements. Forward-looking statements are
subject to various known and unknown risks and uncertainties and
the Company cautions that any forward-looking information
provided by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking
by their nature: (a) our business strategy; (b) our projected operating
results; (c) our ability to obtain external deposits or financing,
or
other sources of liquidity such as asset syndications;
(d) our understanding of our competition; (e) industry
and market trends; and (f)
the expected impact of the adoption of recently issued accounting pronouncements
on our financial statements.
The Company’s actual
results could differ materially
from those anticipated by such forward-looking statements due to a number
of factors, some of which
are beyond the Company’s control,
including, without limitation:
•
availability, terms and
deployment of funding and capital;
•
changes in our industry,
interest rates, the regulatory environment or the general economy resulting in changes
to our business
strategy;
•
the degree and nature of our competition;
•
availability and retention of qualified personnel;
•
general volatility of the capital markets; and
•
the factors set forth in the section captioned “Risk Factors” in Item 1A of this Form
10-K.
Forward-looking statements apply only as of the date made and the Company
is not required to update forward-looking statements for
subsequent or unanticipated events or circumstances. For any forward
-looking statements contained in any document, we claim the
protection of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995.
As
used herein, the terms “Company,”
“Marlin,” “Registrant,” “we,” “us” or “our” refer to Marlin Business Services
Corp. and its
subsidiaries.
O
VERVIEW
Founded in 1997, we are a nationwide provider of credit products and services
to small and mid-sized businesses. The products and
services we provide to our customers include loans and leases for the acquisition of
commercial equipment (including Commercial
Vehicle
Group (“CVG”) assets) and working capital loans. In May 2000, we established
AssuranceOne, Ltd., a Bermuda-based,
wholly-owned captive insurance subsidiary (“Assurance One”),
which enables us to reinsure the property insurance coverage for the
equipment financed by Marlin Leasing Corporation (“MLC”) and Marlin
Business Bank (“MBB”) for our small business customers.
In 2008, we opened MBB, a commercial bank chartered by the State of Utah
and a member of the Federal Reserve System. MBB
serves as the Company’s primary
funding source through its issuance of Federal Deposit Insurance Corporation
(“FDIC”)-insured
deposits.
In January 2017, we completed the acquisition of Horizon Keystone Financial (“HKF”), an
equipment leasing company
which identifies and sources lease and loan contracts for investor partners
for a fee, and in September 2018, we completed the
acquisition of Fleet Financing Resources (“FFR”), an company specializing
in the leasing and financing of both new and used
commercial vehicles, with an emphasis on livery equipment and other
types of commercial vehicles used by small businesses.
We are continuing
to execute on our objective to transition from a micro-ticket equipment lessor into
a nationwide provider of capital
solutions to small businesses.
This includes the following priorities:
a focus on strategically expanding our target market; better
leveraging our capital and fixed cost base through origination and
portfolio growth, improving our operating efficiency,
and
proactively managing our risk profile.
-33-
We access our end
user customers primarily through origination sources consisting of independent
commercial equipment dealers,
various national account programs, through direct solicitation of our
end user customers and through relationships with select lease
and loan brokers. We
use both a telephonic direct sales model and, for strategic larger
accounts, outside sales executives to market to
our origination sources and end user customers. Through these origination
sources, we are able to cost-effectively access end user
customers while also helping our origination sources obtain financing
for their customers.
E
XECUTIVE
S
UMMARY
In 2020, we faced unprecedented operating challenges and macro
-economic uncertainty from the COVID-19 pandemic.
Our initial
focus from the beginning of the COVID-19 crisis was working with existing
customers to protect the value of our portfolio and
limiting the erosion of shareholder capital.
To this end, we initiated a loan
modification program in response to the pandemic, and
assisted some of our borrowers by originating loans guaranteed under the
Small Business Administration’s (SBA’s)
Paycheck
Protection Program (“PPP”).
In addition, early in response to the onset of the pandemic, we temporarily
tightened underwriting
standards for areas of elevated risk, and we continue to update such risk assessments based
on current conditions.
In response to the potential impacts on our business resulting from the pandemic,
we took a series of actions to preserve our capital
and liquidity and reposition the business for success once the full effects
of the pandemic are realized and the economy begins to
recovery.
These actions included: (i) temporary re-allocation of resources from front-end origination
activities to portfolio servicing
and collection activities (ii) cost reduction initiatives that led to a permanent
reduction of approximately 80 employees and (iii) a re-
organization of origination and processing platforms
to accelerate automation and digitization.
We are currently
targeting the rollout
of our digital origination platform, which we are calling Express, by the middle
of 2021.
We are continuing
to monitor the evolving
health crisis, and its impacts on our operations and ability to serve our
customers in this changing environment.
Any return to pre-
pandemic levels of activity,
and the long-term impacts of this crisis on our market, remains uncertain and
will be dependent, among
other things, on the timing and pace of the macro-economic recovery
and the execution of the strategy that we undertook in 2020.
We recognized
$ 0.3 million Net income for the year ended December 31, 2020, down from $27.1 million
in 2019.
Significant drivers
of our results for the year include:
Provisions for credit losses
information available at the end of each period, we had significant reserve
building in the first half of 2020, including recognizing
$34.7 million of increases to our estimate related to changing economic
conditions primarily resulting from the effects of COVID-
19 and our expected impacts on our portfolio.
In the second half of the year, as we received updated
forecast information and
observed the actual performance of our portfolio, we lowered our expected
losses by $12.3 million. At year end, our allowance
was $44.2 million, or 5.09% as a percentage of receivables, an increase
from $21.7 million (2.15%) at the end of the prior year.
Our current estimate of credit losses incorporates all of our current
judgments about the impact of the COVID-19 pandemic on
our portfolio.
Modification program
this program, we completed payment deferral modifications of over
5,600 contracts in our owned portfolio.
As of December 31,
2020,
$111.2 million (or 12.8%) of
our net investment were modified pursuant to that program, and 92% of those contracts are
out of the deferral period by year end.
We continue
d
to process extended modifications of contracts in the fourth quarter for
customers with prolonged COVID-19 impacts as part of our loss mitigation
strategies.
Cost Reduction
program was executed promptly in response to COVID-19 pandemic,
driving reductions of $10.4 million in Salary
and benefits expense and $1.7 million in General and administrative expense,
as compared to the prior year.
We continue to
assess all other aspects of our expense base in order to stabilize our operations
and minimize the negative impacts of the ongoing
pandemic.
Origination and Sales Volumes
defensive position since the pandemic began. Total
sourced origination volume of $367.1 million was well below our
volume
from last year of $801.9 million due to a variety of factors, which include:
(i) the
purposeful actions we took in the second and
third quarters to reduce our workforce and re-position the frontend of our
business; (ii) the continuing soft demand for financing
by the small business community due to challenges facing many industries resulting
from the continued economic fallout of
COVID-19 across much of the United States; and (iii) lower approval rates
stemming from our tighter underwriting criteria.
-34-
In addition, our gain on leases and loans sold is $19.8 million lower for 2020 as compared to
2019, driven by disruptions in the
capital markets from the current economic environment.
Our 2020 sales occurred in the first quarter; we retained substantially all
of our origination volume on our balance sheet for the remainder
of the year.
While we experienced modest improvement in origination volumes
in the fourth quarter of 2020 compared to earlier in the year,
and
have seen some improving trends in delinquency,
we still are experiencing negative impacts from the effects of the pandemic
and as
this period of uncertainty continues to impact the macroeconomic environment.
Given the ongoing health crisis in the United States,
any return to pre-pandemic levels of activity remains uncertain.
At year end, our employees continue to work remotely,
and we have not experienced any significant interruption to our operations
from that transition.
We continue to assess how
to best evolve our operations and how to best serve our customers in
this changing
environment.
Stock Repurchase Plan
During the year ended December 31, 2020,
the Company purchased 264,470 shares of its common stock in the open market under
the
2019 Repurchase Plan at an average cost of $16.09. At December 31, 2020
,
$4.7 million of authorizations remain under the 2019
Repurchase Plan.
This authority may be exercised from time to time and in such amounts as market conditions
warrant. The stock
repurchase program does not obligate us to acquire any particular amount
of common stock, and it may be suspended at any time at
our discretion. Stock repurchases are funded using our working capital.
-35-
F
INANCE
R
ECEIVABLES
AND
A
SSET
Q
UALITY
The following table summarizes certain portfolio statistics for the
periods presented:
December 31,
2020
2019
2018
(Dollars in thousands)
Finance receivables:
Net investment in leases and loans, excluding allowance, end of period
$
825,056
$
1,028,215
$
1,016,840
Average finance
receivables for the year
(1)
945,599
1,028,617
944,588
Origination Volume
(5)
367,128
801,946
704,894
Assets Sold
28,342
310,415
138,995
Allowance for credit losses :
(3)
End of period
$
44,228
$
21,695
$
16,100
As a % of end of period receivables
(1)
5.09%
2.15%
1.62%
Annualized net charge-offs to average
total finance receivables
(1)
3.43%
2.18%
1.93%
Leases and Loans Modified:
Payment deferral program
(2)
End of period
$
111,209
—
—
As a % of end of period receivables
12.8%
—
—
Other Restructured leases and loans, end of period
$
922
$
2,906
$
2,323
Delinquencies, end of period:
(4)
Equipment Finance and CVG:
Greater than 60 days past due, $
$
6,582
$
8,112
$
6,036
Greater than 60 days past due, %
0.78%
0.86%
0.63%
Working
Capital:
Greater than 30 days past due, $
$
741
$
855
$
492
Greater than 30 days past due, %
3.69%
1.42%
1.35%
__________________
(1)
For purposes
of asset
quality and
allowance calculations,
the effects
of (i)
the allowance
for credit
losses and
(ii) initial
direct costs
and fees
deferred are excluded.
(2)
Represents balance
of active
contracts that
were part
of our
2020 payment-deferral
modification program.
As of
December 31,
2020, 92%
of
the modified contracts are out of the deferral period.
See further discussion of our loan modification program below.
(3)
The December 31, 2019 end of period allowance and % of receivables were $33,603 and 3.27%, respectively,
after the January 1, 2020 adoption
of CECL.
See further discussion below.
(4)
Calculated
as
a
percentage
of
net
investment
in
leases
and
loans.
Contracts
that
are
part
of
the
payment
deferral
modification
program
will
appear in our delinquency and non-accrual measures based on their performance against their modified terms.
(5)
For the
year ended
December 31,
2020, excludes
$4.4 million
of loans
originated under
the Paycheck
Protection Program
(PPP).
In the
third
quarter of 2020, the Company sold the PPP portfolio and will have no continuing involvement with those receivables.
-36-
Finance Receivables.
During the year ended December 31, 2020,
we generated 16,602 new Equipment Finance leases and loans with equipment
costs of
$367.1 million, compared to 31,246 new Equipment Finance leases and loans
with equipment costs of $801.9 million generated for
the year ended December 31, 2019.
Equipment finance originations decreased 52% for 2020 as compared to
the prior year.
Working
Capital loan originations were $33.2 million during the year ended
December 31, 2020,
compared to $108.6 million for the prior year,
a 69% decrease.
Our origination volumes for 2020 were lower than our historical norms,
primarily driven by decreased demand attributable to COVID-
19 related business shutdowns and other macroeconomic factors,
as well as our actions to reduce the workforce in the second and third
quarters of this year.
During the year, our total originations were $151.5
million for the first quarter, declining to $65.4 million,
$67.1
million, and $83.0 million for the second, third and fourth quarters,
respectively.
While we experienced modest improvement in
origination volumes in the fourth quarter compared to earlier in the year,
we still are experiencing negative impacts from the effects of
the pandemic as this period of uncertainty continues to impact the macroeconomic
environment.
Given the ongoing health crisis in
the United States, any return to pre-pandemic levels of activity remains uncertain.
Driven by the declines in origination volume, our average net investment
in total finance receivables decreased 8.1% for 2020 as
compared to 2019, and our ending net investment in leases and loans,
excluding allowance, has declined 19.8% at December 31, 2020
compared to prior year end.
See further discussion of the impacts of lower volumes and decreased
portfolio size within discussion of
our Results of Operations section, in particular Net interest margin
and Gain on leases and loans sold.
Allowance for credit losses.
The following table provides a rollforward of our Allowance for credit loss:
Twelve Months Ended December 31,
2020
2019
2018
(Dollars in thousands)
Allowance for credit losses, December 31, 2019
$
21,695
Adoption of ASU 2016-13 (CECL),
January 1, 2020
11,908
Allowance for credit losses, beginning of period
33,603
$
16,100
$
14,851
Provision for credit losses
38,509
28,036
19,522
Net Charge-offs:
Equipment Finance
(26,796)
(18,164)
(15,950)
Working
Capital
(2,781)
(2,531)
(1,477)
CVG
(2,838)
(1,746)
(846)
(32,415)
(22,441)
(18,273)
Realized cashflows from Residual Income
4,531
—
—
Allowance for credit losses, end of period
$
44,228
$
21,695
$
16,100
Year
Ended December 31, 2020:
The allowance for credit losses as a percentage of total finance receivables
increased to 5.09% as of
December 31, 2020,
from 2.15% as of December 31, 2019.
This increase in reserve coverage is primarily driven by both the $11.9
million increase from the January 1, 2020 adoption of CECL (as defined
below),
which increased the effective coverage to 3.27% as
of that date, and the $14.0 million of forecast and qualitative adjustments included
in the estimate of credit loss as of December 31,
2020 related to the increased risks for future losses driven by the ongoing
impacts from the COVID-19 pandemic,
as discussed further
below.
-37-
Adoption of ASU 2016-13 / CECL.
Effective January 1, 2020, we adopted new guidance
for accounting for our allowance, or ASU 2016-13, Financial Instruments -
Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (“CECL”),
which replaces the probable/
incurred loss model that we historically used to measure our allowance,
with a measurement of expected credit losses for the
contractual term of our current portfolio of loans and leases.
Under CECL, an allowance, or estimate of credit losses, will be
recognized immediately upon the origination of a loan or lease, and will be
adjusted in each subsequent reporting period.
This
estimate of credit losses takes into consideration all remaining cashflows
the Company expects to receive or derive from the pools
of contracts, including recoveries after charge-off,
accrued interest receivable and certain future cashflows from residual assets.
The provision for credit losses recognized in our Consolidated Statements
of Operations under CECL, starting in 2020, will be
primarily driven by origination volumes, offset by the
reversal of the allowance for any contracts sold, plus adjustments for
changes in estimate each subsequent reporting period, including
adjustments for economic forecasts within a reasonable and
supportable time period.
The impact of adopting CECL effective January 1, 2020
included a $11.9 million increase to the allowance,
an $8.9 million
decrease to Retained earnings and $3.0 million impact to our Net deferred
income tax liability.
In the accompanying Notes to
Consolidated Financial Statements, see Note 2 –
Summary of Significant Accounting Policies
, for further discussion of the
adoption of this accounting standard, and see Note 7 –
Allowance for Credit Losses
, for further discussion of the Company’s
methodology for measuring its allowance as of the adoption date.
Provision for credit losses
.
The provision for credit losses recognized after the adoption of CECL is primarily
driven by origination volumes, offset by the
reversal of the allowance for any contracts sold, plus adjustments for changes
in estimate each subsequent reporting period.
For
2020, given the wide changes in the macroeconomic environment driven
by COVID-19, the changes in estimate is the most
significant driver of provision.
In contrast, the allowance estimate recognized in 2019 under the probable,
incurred model was
based on the current estimate of probable net credit losses inherent
in the portfolio.
For the year ended December 31, 2020, the $ 38.5 million provision
for credit losses recognized was $10.5 million greater than
the $ 28.0 million provision recognized for same period of 2019.
Provision for the year ended December 31, 2020 includes $18.9
million from originations, and $19.6 million driven by updates to economic
forecast and qualitative adjustments related to
COVID-19 and other model updates.
For the Equipment Finance portfolio, our estimated credit losses includes updates
to a reasonable and supportable forecast based
on the modeled correlation of changes in the loss experience of the our
portfolio to certain economic statistics, specifically
changes in the unemployment rate and changes in the number of business bankruptcies.
Starting in the first quarter,
we are using
a 6-month period for applying the economic statistics due to the uncertainty in
the current economic environment related to
COVID-19 pandemic.
As of December 31, 2020, our estimate of credit loss for Equipment Finance includes
probability
weighting alternate forecast scenarios for those economic statistics, to address
the continuing uncertainty in the economic climate
and uncertainty around our portfolio’s
performance in these conditions.
Equipment Finance provision for the year ended
December 31, 2020 includes $10.9 million driven by updates to economic
forecast and qualitative adjustments related to COVID-
19 and other model updates.
For the Working
Capital portfolio segment, our estimate of increased losses is based on qualitative adjustments,
taking into
consideration alternative scenarios to determine the Company’s
estimate of the ongoing risk related to COVID-19.
Working
Capital provision for the year ended December 31, 2020 includes $1
.2 million driven by updates to economic forecast and
qualitative adjustments related to COVID-19 and other model updates.
For the CVG segment, our estimate of increased losses is based on qualitative
adjustments, taking into consideration the increased
risk of a population of motor coach receivables that have prolonged
impacts from the COVID-19 pandemic, as well as an
assessment of alternative scenarios to estimate the expected performance
of this segment in the current economic environment.
CVG provision for the year ended December 31, 2020 includes $7.5 million
driven by these updates to economic forecast and
qualitative adjustments related to COVID-19 and other model updates.
-38-
The qualitative and economic adjustments to our allowance take into
consideration information and our judgments as of
December 31, 2020,
and are based in part on an expectation for the extent and timing of impacts from
COVID-19 on
unemployment rates and business bankruptcies, and are based on our
current expectations of the performance of our portfolio in
the current environment.
See further discussion of the risks to our estimate below.
Net Charge-offs.
Equipment Finance and TFG receivables are generally charged
-off when they are contractually past due for 120 days or more.
Working
Capital receivables are generally charged-off at 60 days past
due.
Total portfolio
net charge-offs for the year December 31, 2020 were $32.4
million (3.43% of average total finance receivables on
an annualized basis), compared to $22.4 million (2.18%)
for 2019.
The elevated net charge-offs for 2020 were primarily driven
by
the economic impact of the COVID-19 pandemic, and we experienced
our highest levels of net charge-offs in the third quarter
of
2020.
While we experienced a positive trend in net charge-off
levels in the fourth quarter, we continue to monitor
the continued
risks in our portfolio from the COVID-19 driven economic environment.
A large portion of our portfolio was part of the payment deferral modification
program, as discussed above.
While 92% of those
contracts are out of the deferral period by December 31, 2020, the long-term
performance of the modified portfolio remains
uncertain.
We are continually monitoring
the performance of our portfolio and assessing all related risks to ensure that our
allowance estimate is sufficient to cover the expected losses from
COVID-19.
Our best estimate of the risk of future net credit
losses and the near-term uncertainty of the macro-economic environment
is reflected in our allowance for loan losses of $44.2
million as of December 31, 2020.
See further discussion about the risks to our reserve estimate discussed below.
Residual Income.
Residual income includes income from lease renewals and gains and
losses on the realization of residual values of leased
equipment disposed at the end of term
In 2019 and prior years, t
he Company had previously recognized residual income within
Fee Income in its Consolidated Statements
of Operations; the adoption of CECL results in any realized amounts of residual
income being captured as a component of the activity of the allowance because
the Company’s estimate of credit
losses under
CECL takes into consideration all cashflows the Company expects to
receive or derive from the pools of contracts.
Our recorded allowance reflects our current estimate of the expected
credit losses of all contracts currently in portfolio based on our
current assessment of information regarding the risks of our current
portfolio, default and collection trends, a reasonable and
supportable forecast of economic factors, qualitative adjustments based
on our best estimate of expected losses for certain portfolio
segments, among other internal and external factors.
In particular, as of December 31, 2020, these assumptions
include our current
expectations of the future economic impacts of the COVID-19 pandemic
and our current expectations for the performance of our
modified loan portfolio.
Our allowance measurement is an estimate, is inherently uncertain,
and is reassessed at each measurement
date.
We may recognize
credit losses in excess of our reserve, or revise our estimate of expected credit losses in the future, and
such
amounts may be significant, based on: (i) the actual performance of our
portfolio, including the performance of the modified portfolio;
(ii) any further changes in the economic environment; or (iii) other developments
or unforeseen circumstances that impact our
portfolio.
Years
Ended December 31, 2019 and 2018:
Provision for credit losses
.
The provision for credit losses increased $8.5 million, or 43.6%, to $28.0
million for the year ended December 31, 2019 from $19.5
million for the year ended December 31, 2018.
Our provision for credit losses is charged against earnings to
maintain our allowance
at the appropriate level based on the projected probable net credit losses inherent
in our portfolio.
Our projection of probable net
credit losses incorporates a migration analysis, which is partially based
on the delinquency status of the portfolio as of the
measurement date, as well as consideration of multiple qualitative factors.
The increase in our provision for credit losses was driven in part by higher
delinquency experience in the portfolio as of December 31,
2019, resulting in a higher projection of expected credit losses. In addition,
the increase in the provision was partially driven by
replenishing the allowance from a higher charge-off
experience.
-39-
As of December 31, 2019, delinquent accounts 60 days or more past due (as a percentage
of minimum lease payments receivable for
leases and as a percentage of principal outstanding for loans) were 0.85%,
compared to 0.65% at December 31, 2018.
This trend in
higher delinquency experience is consistent with the trends for aging of
receivables in the equipment leasing industry,
as published in
the Monthly Leasing and Finance Index (MLFI-25) of the Equipment
Leasing and Finance Association.
Net Charge-offs.
Net charge-offs were $22.4 million for
the year ended December 31, 2019, compared to $18.3 million for the year ended December
31, 2018. Net charge-offs as a percentage of
average total finance receivables increased to 2.18% during the year ended December
31,
2019, from 1.93% for the year ended December 31, 2018. Industry data on
average charge-offs from MLFI-25 indicates an 9.4%
increase in net charge-offs as a percent of
receivables for peers, while our increase in net charge-off
percentage is 13.0%. Our analysis
of our higher charge-off experience indicates
that the small business and lower credit quality borrowers in our portfolio were
disproportionately impacted by the economic headwinds observed
in 2019, particularly in the second-half of the year.
Both 2019 and
2018 include charge-offs related to fraudulent
activity of single vendor partners (separate incidents) of $0.9 million
and $1.2 million
respectively.
Leases and Loans Modified.
In response to COVID-19, starting in mid-March 2020, we instituted a payment
deferral program in order to assist our small-business
customers that request relief who are current under their existing obligations.
Our COVID-19 modification program allows for up to 6
months of deferred payments.
The below table outlines certain data on the modified population based
on the net investment balance and status as of December 31,
2020.
Equip.Fin
Working
and CVG
Capital
Total
(Dollars in thousands)
Active Modified Population:
Modified Contracts, out of deferral period
$
94,962
$
6,922
$
101,884
Extended modifications in fourth quarter
9,325
—
9,325
Total Program
$
104,287
$
6,922
$
111,209
% of total segment receivables
12.3%
34.6%
12.8%
Active Modification Population:
On Non Accrual as of December 31, 2020
$
10,731
$
846
$
11,577
Resolved Population:
Charge-Offs of Modified Contracts, year
ended December 31, 2020
$
2,374
$
889
$
3,263
Our initial deferral program in response to COVID-19 extended through
September 30, 2020, and in accordance with the interagency
guidance, loans modified were not considered TDRs and followed our
general non-accrual policies with respect to their modified
terms.
This program allowed for up to 6 months of fully deferred or reduced paymen
ts.
As of December 31, 2020, 92% of our total
modified contracts, are out of the deferral period.
In the fourth quarter of 2020, the modification period of contracts was general
ly extended only as part of our loss mitigation strategies
for customers with prolonged negative impacts from the pandemic.
These extended deferrals total $9.3 million at December 31, 2020,
or 8% of the modified population, and the extensions generally consisted
of requiring a partial payment of 25% to 50% of the original
schedule, with full payment scheduled to resume in the first quarter of
2021 for 56% of the population, and the remainder in the
second quarter of 2021.
We evaluated these extended
deferrals on a program basis and concluded that these deferrals are beyond
a
short-term period, the deferrals were due to the borrower’s
financial difficulties, and the payment deferrals are a concession.
The loan
-40-
contracts were assessed as troubled debt restructurings and were put
on non-accrual, and the extended lease contracts were also put on
non-accrual.
The estimate of increased risk of credit loss for these contracts was assessed as discussed with the
qualitative
adjustments above.
There were no defaults of these extended, troubled receivables during the year
ended December 31, 2020.
Delinquency and Non-Accrual
The following table outlines the delinquency status of the Company’s
portfolio as of December 31, 2020,
including information on the
population of restructured contracts, and contracts with restructure
requests:
Net Investment (in thousands)
Delinquency Rate by population
30
60
90+
Current
Total
30
60
90+
Current
Total
Equip.Finance and CVG
Restructured Portfolio
$2,461
$610
$1,349
$99,867
$104,287
2.36%
0.58%
1.29%
95.77%
100%
Non-Restructured
4,425
2,169
2,453
735,916
744,963
0.59%
0.29%
0.33%
98.79%
100%
Total
$6,886
$2,779
$3,802
$835,783
$849,250
0.81%
0.33%
0.45%
98.41%
100%
Net Investment (in thousands)
Delinquency Rate by population
15
30
60+
Current
Total
15
30
60+
Current
Total
Working Capital
Restructured Portfolio
$225
$550
$135
$6,012
$6,922
3.25%
7.95%
1.95%
86.85%
100%
Non-Restructured
36
56
—
13,019
13,111
0.27%
0.43%
0.00%
99.30%
100%
Total
$261
$606
$135
$19,031
$20,033
1.30%
3.03%
0.67%
95.00%
100%
Contracts that are part of the payment deferral modification program
are reflected in our Delinquency and Non-Accrual measures
based on their performance against their modified terms.
Equipment Finance receivables over 30 days delinquent were 159
basis points as of December 31, 2020, down 54 basis points from
September 30, 2020, and up 19 basis points from December 31,
2019. Working Capital receivable
s
over 15 days delinquent were 500
basis points as of December 31, 2020, up 107 basis points from September
30, 2020, and up 325
basis points from December 31,
2019.
A significant portion of the restructured portfolios is out of the deferral period
as of December 31, 2020, and we continue to see
elevated levels of delinquency from that population as compared to the non-restructured
portfolio.
The following table summarizes non-accrual leases and loans in the Company’s
portfolio:
December 31,
2020
2019
2018
(Dollars in thousands)
$
13,357
$
4,645
$
3,115
932
946
492
$
14,289
$
5,591
$
3,607
As of December 31, 2020, the increase in leases and loans on non-accrual
is driven by a population of $9.3 million Equipment Finance
and CVG loan modifications contracts that were further extended in the
fourth quarter and were placed on non-accrual due to their risk
characteristics.
Income recognition is discontinued on Equipment Finance leases or loans, including
CVG loans, when a default on monthly payment
exists for a period of 90 days or more. Income recognition resumes when the
lease or loan becomes less than 30 days delinquent.
-41-
Working
Capital Loans are generally placed in non-accrual status when they are 30 days past due.
The loan is removed from non-
accrual status once sufficient payments are made
to bring the loan current and evidence of a sustained performance period as reviewed
by management.
The Company has no loans 90 days or more past due that were still accruing
interest for any of the periods
presented.
R
ESULTS
OF
O
PERATIONS
Comparison of the Year
s
Ended December 31, 2020 and December 31, 2019
Net income.
Net income of $0.3 million was reported for the year ended December 31, 2020
,
resulting in diluted EPS of $0.03,
compared to net
income of $27.1 million and diluted EPS of $2.20 for the year ended December
31, 2019.
This decrease in Net income was primarily
driven by:
-
$14.1 million decrease in Net interest and fee income, driven primarily by
a decline in the size of our finance receivable
portfolio and lower funding needs;
-
$10.5 million increase in Provision for credit losses, driven by refining our
loss estimates for expected increased credit losses
driven by the impacts of the pandemic on our portfolio.
In addition, we adopted CECL on January 1, 2020 and substantially
changed the methodology for measuring the estimate of credit loss.
See further discussion of the Provision and the change in
measurement in the prior section “—Finance Receivables and Asset Quality”;
-
$19.8 million decrease in gains on leases and loans sold due to a decrease in
assets sold resulting from disruptions in the
capital markets during this current economic environment;
-
$7.7 million impairments of Goodwill and intangible assets, driven by
declines in the fair value of its reporting unit and
projected volumes;
Those drivers of decreases to Net income were partially offset by:
-
$10.4 million decrease in Salaries and benefits, driven primarily by
lower Commissions, Incentives and the Company’s
proactive cost reduction measures;
-
$13.2 million favorable change in Income
tax (benefit),
driven primarily by lower income before taxes and a $3.3 million
benefit from the remeasurement of the federal net operating losses driven
by provisions of the CARES Act.
Average balances
and net interest margin.
The following table summarizes the Company’s
average balances, interest income,
interest expense and average yields and rates on major categories of interest
-earning assets and interest-bearing liabilities for the years
ended December 31, 2020 and 2019.
-42-
Year Ended December 31,
2020
2019
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
Balance
(1)
Interest
Rates
Interest-earning assets:
Interest-earning deposits with banks
$
164,132
$
419
0.25
%
$
122,762
$
2,731
2.23
%
Time deposits
10,940
193
1.77
12,272
308
2.51
Restricted interest-earning deposits with banks
6,831
9
0.13
12,231
95
0.78
Securities available for sale
10,676
207
1.94
10,495
269
2.56
Net investment in leases
(2)
863,875
75,948
8.79
936,707
84,790
9.05
Loans receivable
(2)
81,724
16,023
19.61
91,910
19,227
20.92
1,138,178
92,799
8.15
1,186,377
107,420
9.05
Non-interest-earning assets:
Cash and due from banks
5,249
5,551
Allowance for loan and lease losses
(50,710)
(17,905)
Intangible assets
6,839
7,844
Goodwill
1,666
6,887
Operating lease right-of-use assets
8,269
7,168
Property and equipment, net
8,435
5,067
Property tax receivables
8,777
6,990
Other assets
30,383
33,944
18,908
55,546
$
1,157,086
$
1,241,923
Interest-bearing liabilities:
Certificate of Deposits
(3)
$
806,763
$
17,357
2.15
%
$
836,249
$
19,999
2.39
%
Money Market Deposits
(3)
45,418
239
0.53
22,870
537
2.35
Long-term borrowings
(3)
51,913
2,272
4.38
111,730
4,497
4.02
904,094
19,868
2.20
970,849
25,033
2.58
Non-interest-bearing liabilities:
Sales and property taxes payable
6,318
6,308
Operating lease liabilities
9,207
8,524
Accounts payable and accrued expenses
22,290
26,449
Net deferred income tax liability
24,566
26,300
62,381
67,582
966,475
1,038,430
Stockholders’ equity
190,611
203,493
$
1,157,086
$
1,241,923
Net interest income
$
72,931
$
82,388
Interest rate spread
(4)
5.95
%
6.47
%
Net interest margin
(5)
6.41
%
6.94
%
Ratio of average interest-earning assets to
125.89
%
122.20
%
-43-
__________________
(1)
Average balances were calculated using average daily balances.
(2)
Average balances of leases and loans include non-accrual leases and loans, and are presented net of
unearned income. The average balances of leases and loans
do
not include the effects of (i) the allowance for credit losses and (ii)
initial direct costs and fees deferred.
(3)
Includes effect of transaction costs.
Amortization of transaction costs is on a straight-line basis, resulting
in an increased average rate whenever average portfolio
balances are at reduced levels.
(4)
Interest rate spread represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(5)
Net interest margin represents net interest income as a percentage
of average interest-earning assets.
The following table presents the components of the changes in net interest income
by volume and rate.
Year Ended December 31, 2020 Compared To
Year Ended December 31, 2019
Increase (Decrease) Due To:
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
696
$
(3,008)
$
(2,312)
Restricted interest-earning deposits with banks
(30)
(56)
(86)
Time Deposits
(31)
(84)
(115)
Securities available for sale
5
(67)
(62)
Net investment in leases
(6,454)
(2,388)
(8,842)
Loans receivable
(2,046)
(1,158)
(3,204)
(4,237)
(10,384)
(14,621)
Interest expense:
Certificate of Deposits
(687)
(1,955)
(2,642)
Money Market Deposits
300
(598)
(298)
Long-term borrowings
(2,588)
363
(2,225)
(1,640)
(3,525)
(5,165)
Net interest income
$
(3,258)
$
(6,198)
$
(9,456)
__________________
(1)
Changes due to volume and rate are calculated independently for
each line item presented rather than presenting vertical
subtotals for the individual volume and rate columns.
Changes attributable to changes in volume represent changes in average
balances multiplied by the prior period’s
average rates. Changes attributable to changes in rate represent changes in
average
rates multiplied by the prior year’s average balances. Changes attributable
to the combined impact of volume and rate have
been allocated proportionately to the change due to volume
and the change due to rate.
-44-
Net interest and fee margin.
The following table summarizes the Company’s
net interest and fee income as a percentage of average
total finance receivables for the years ended December 31, 2020 and 2019
.
Year Ended December 31,
2020
2019
(Dollars in thousands)
Interest income
$
92,799
$
107,420
Fee income
10,560
15,205
Interest and fee income
103,359
122,625
Interest expense
19,868
25,033
Net interest and fee income
$
83,491
$
97,592
Average total
finance receivables
(1)
$
945,599
$
1,028,617
Percent of average total finance receivables:
Interest income
9.81
%
10.44
%
Fee income
1.12
1.48
Interest and fee income
10.93
11.92
Interest expense
2.10
2.43
Net interest and fee margin
8.83
%
9.49
%
__________________
(1)
For the calculations above, the effects of (i) the allowance
for credit losses and (ii) initial direct costs and fees deferred are
excluded.
Net interest and fee income decreased $14.1 million, or 14.4%, to $83.5
million for the year ended December 31, 2020 from $97.6
million for the year ended December 31, 2019.
The net interest and fee margin was 8.83% and 9.49% for the years ended
December
31, 2020 and December 31, 2019,
respectively
.
Interest income, net of amortized initial direct costs and fees, decreased
$14.6 million, or 13.6%,
to $92.8 million for the year ended
December 31, 2020 from $107.4 million for the year ended December
31, 2019.
The decrease in interest income was principally due
to an 8.1% decrease in average total finance receivables, which decreased
$83.0 million to $945.6 million at December 31, 2020 from
$1,028.6 million at December 31, 2019.
The decrease in average total finance receivables was primarily due to lower origination
volume along with the customary loan repayments and charge
-offs.
The average yield on the portfolio decreased 63 basis points to
9.81%
from 10.44% in the prior year. The
weighted average implicit interest rate on new finance receivables decreased 220
basis
points to 10.66% for the year ended December 31, 2020,
from 12.86% for the year ended December 31, 2019.
The decrease was
primarily driven by a shift in mix away from higher-yield Working
Capital originations that dropped from 13.55% of originations in
fiscal 2019 to 9.05% in fiscal 2020, along with a decrease of 415 basis points
in the implicit yield on those Working
Capital loans
from 34.72% for the year ended December 31, 2019 to 30.57% for the
year ended December 31, 2020.
Fee income was $10.6 million for the year ended December 31, 2020
and $15.2 million for the year ended December 31, 2019,
and as
a percentage of average total finance receivables, decreased 36 basis points
to 1.12% for the year ended December 31, 2020 from
1.48% for the year ended December 31, 2019.
Fee income included approximately $3.7 million of net residual income for the
year
ended December 31, 2019.
For 2020, after the adoption of CECL, all future cashflows from the Company’s
pools of loans are
included in the measurement of the allowance, including future cashflows
from net residual income.
Amounts of residual income are
presented within the rollforward of the Allowance, as discussed further
in “—Finance Receivables and Asset Quality”.
Fee income also included approximately $7.1 million and $8.4 million
in late fee income for the year ended December 31, 2020 and
December 31, 2019,
respectively. Late fees remained
the largest component of fee income at 0.75% as a percentage of
average total
finance receivables for the year ended December 31, 2020,
compared to 0.89% for the year ended December 31, 2019.
-45-
Interest expense decreased $5.1 million to $19.9 million for the year
ended December 31, 2020 from $25.0 million for the year ended
December 31, 2019,
primarily due to a decrease of $2.6 million on lower deposit balances as well as a decrease of
$1.9 million due to
the continuing paydown of outstanding long-term debt.
Interest expense, as an annualized percentage of average total finance
receivables, decreased 33 basis points to 2.10% for the year ended
December 31, 2020,
from 2.43% for the year ended December 31,
2019.
The average balance of total interest-bearing liabilities was $904.1 million
and $970.8 million for the years ended December 31,
2020 and December 31, 2019, respectively,
and the average interest expense on those liabilities was 2.20% and 2.58% for the years
ended December 31, 2020 and December 31, 2019,
respectively.
For the year ended December 31, 2020,
average term securitization outstanding was $51.9 million at a weighted
average coupon of
4.38%. For the year ended December 31, 2019,
average term securitization outstanding was $111.7
million at a weighted average
coupon of 4.02%.
Our wholly-owned subsidiary,
MBB, serves as our
primary funding source. MBB raises time deposits through a variety of
sources
including: directly from customers, through the use of on-line listing services,
and through the use of deposit brokers.
At December
31, 2020,
brokered certificates of deposit represented approximately 52.1% of total
deposits, while approximately 40.8% of total
deposits were obtained from
direct channels,
and 7.1% were in the brokered MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans decreased to $2.4 million for the year ended December
31,
2020,
from
$22.2 million for the year ended December 31, 2019,
or $19.8 million reduction in income. Assets sold decreased to
$28.3 million, for the year ended December 31, 2020 compared to
$310.4 million for the year ended December 31, 2019.
Disruptions
in the capital markets due to the impact of COVID-19 pandemic on the
economic environment resulted in a lack of demand in the
syndication market since the end of the first quarter of 2020 and we retained
substantially all of our origination volume on our balance
sheet.
Our sales execution decisions, including the timing, volume and frequency
of such sales, depend on many factors including our
origination volumes, the characteristics of our contracts versus market
requirements, our current assessment of our balance sheet
composition and capital levels, and current market conditions, among
other factors.
Driven by the continued market disruptions
resulting from the COVID-19 pandemic, we may have difficulty
accessing the capital market and may find decreased interest and
ability of counterparties to purchase our contracts, or we may be unable
to negotiate terms acceptable to us.
Insurance premiums written and earned.
Insurance
premiums written and earned declined slightly to $8.7 million for the year
ended
December 31, 2020 from $8.8 million for the year ended December 31, 2019.
Other income.
respectively.
The major components
of other income are property tax income and administration fees, insurance
policy fees and
syndication servicing.
Salaries and benefits expense
.
The following table summarizes the Company’s
Salary and benefits expense:
Year Ended December 31,
2020
2019
(Dollars in thousands)
Salary, benefits and payroll
taxes
$
27,675
$
28,770
Incentive compensation
4,809
8,694
Commissions
1,299
6,704
Total
$
33,783
$
44,168
-46-
Salaries and benefits expense decreased $10.4 million, or 23.5%, to
$33.8 for the year ended December 31, 2020 from $44.2 for the
year ended December 31, 2019. This change resulted from a $5.4 million
decrease in Commissions due to lower origination volumes
coupled with an updated commission structure and a decrease of $3.9 million
in Incentive compensation due to lower recognized
bonus and share-based compensation amounts driven by the Company’s
operating results. As part of our efforts to tighten our expense
base in response to COVID-19, in April 2020, we put approximately 120
employees on furlough; then in June 2020, we took steps to
permanently reduce our work force by approximately 80 employees. Our headcount
is 254 at December 31, 2020,
down from 348 at
December
31, 2019
.
We recognized
Severance expense in Salary, benefits
and payroll taxes of $1.7 million in 2020, compared to $0.3
million in 2019, in connection with this workforce reduction. We
recognized $2.5 million lower Salary,
benefits and payroll taxes for
the year ended December 31, 2020 as compared to the prior year primarily
from our expense reduction efforts.
General and administrative expense
.
The following table summarizes the Company’s
General and administrative expense.
Year
Ended December 31,
2020
2019
(Dollars in thousands)
Property taxes
$
6,503
$
6,653
Occupancy and depreciation
5,392
5,492
Professional fees
4,233
4,036
Information technology
4,026
3,922
Marketing
1,126
1,744
Insurance-related
2,424
1,564
Credit bureau costs
1,404
1,532
Intangible amortization
767
929
FDIC Insurance fees
1,464
660
Acquisition-related contingent payment fair value adjustment
(1,435)
—
Other G&A
5,010
6,034
General and administrative
$
30,914
$
32,566
General and administrative expense decreased $1.7 million, or 5.2% for
the year ended December 31, 2020.
Components of the
decrease included a $1.4 million reduction to the fair value of the contingent
consideration earn out liability related to our 2018
acquisition of the FFR business, driven by a forecasted decrease in projected
volumes which decreases the liability for estimated
payments.
In addition, we recognized a reduction of $0.7 million Other G&A related travel and
entertainment expenses due to the
travel restrictions imposed during the COVID-19 pandemic, offset
by an increase of $0.8 million in FDIC insurance fees. In addition,
Occupancy and depreciation expense for the year ended December
31, 2020 includes $0.4 million of costs in connection with office
lease terminations as part of our expense reduction efforts.
General and administrative expense as a percentage of average total finance
receivables was 3.27% for the year ended December 31,
2020,
compared to 3.45% for the year ended December 31, 2019.
Goodwill impairment.
our market capitalization falling below book value and other related
impacts, we analyzed goodwill for impairment.
We concluded
that the implied fair value of goodwill was less than it’s
carrying amount, and recognized impairment equal to the entire $6.7
million
balance in the year ended December 31, 2020.
Intangible impairment.
reductions in headcount in its salesforce, we determined we had
a triggering event that required us to check the book value of FFR
vendor and lender intangibles against their current fair value.
As a result of that analysis, we fully impaired the lender intangibles,
recognizing $1.0 million of expense.
The vendor intangibles were not impaired.
Provision for income taxes.
expense of $9.7 million for the year ended December 31, 2019. Our effective
tax rate, which includes a combination of federal and
state income tax rates, was approximately 110.2%
for the year ended December 31, 2020, compared to 26.4% for the year ended
-47-
December 31, 2019. The income tax benefit was primarily driven by a $3.2
million discrete benefit from certain provisions in the
CARES Act that allowed for remeasuring our federal net operating losses for
carryback utilization.
-48-
Comparison of the Years
Ended December 31, 2019 and 2018
Net income.
Net income of $27.1 million was reported for the year ended December
31, 2019, resulting in diluted EPS of $2.20, compared to net
income of $25.0 million and diluted EPS of $2.00 for the year ended December
31, 2018. This increase in Net income was primarily
driven by:
-
$2.1 million increase in Net interest and fee income, driven primarily
by an increase in the size of our finance receivable
portfolio;
-
$13.8 million increase in gains on leases and loans sold due to increased syndication
volumes;
Those drivers of increases to Net income were partially offset by:
-
$8.5 million increase in Provision for credit losses, primarily due to higher
charge-offs attributed to increased delinquencies
in the second half of 2019 as well as the growth in average finance receivables
and charge-offs in the fourth quarter of $0.9
million due to fraudulent activity by a single vendor partner;
-
$4.4 million higher Salaries and benefits due to an increase in personnel,
and commissions driven by increased origination
volume
Return on average assets was 2.18% for the year ended December 31, 2019,
compared to a return of 2.29% for the year ended
December 31, 2018. Return on average equity was 13.33% for the year
ended December 31, 2019, compared to a return of 13.27% for
the year ended December 31, 2018.
Overall, our average net investment in total finance receivables for the
year ended December 31, 2019 increased 8.9% to $1,028.6
million, compared to $944.6 million for the year ended December
31, 2018. This change was primarily due to origination volume
continuing to exceed lease and loan repayments, asset sales and charge
-offs.
The end-of-period net investment in total finance
receivables at December 31, 2019 was $1,006.5 million, an increase
of 0.6% from $1,000.7 million at December 31, 2018.
During the year ended December 31, 2019, we generated 31,246
new leases and loans in the amount of $801.9 million, compared to
33,105 new leases and loans in the amount of $704.9 million originated for
the year ended December 31, 2018. Approval rates
decreased from 57% at December 31, 2018 to 55% at December 31, 2019.
For the year ended December 31, 2019 compared to the year ended
December 31, 2018, net interest and fee income increased $2.1
million, or 2.2%, primarily due to a $10.4 million increase in interest income
and a $0.6 million increase in fee income offset by a $7.6
million increase in interest expense. The provision for credit losses increased
$8.5 million, or 43.6%, to $28.0 million for the year
ended December 31, 2019 from $19.5 million for the year ended
December 31, 2018.
Gain on sale of leases and loans increased $13.8
million for the year ended December 31, 2019 compared to the year
ended December 31, 2018.
Average balances
and net interest margin.
The following table summarizes the Company’s
average balances, interest income,
interest expense and average yields and rates on major categories of interest
-earning assets and interest-bearing liabilities for the years
ended December 31, 2019 and 2018.
-49-
Year Ended December 31,
2019
2018
(Dollars in thousands)
Average
Average
Average
Yields/
Average
Yields/
Balance
(1)
Interest
Rates
Balance
(1)
Interest
Rates
Interest-earning assets:
Interest-earning deposits with banks
$
122,762
$
2,731
2.23
%
$
77,141
$
1,554
2.01
%
Time deposits
12,272
308
2.51
8,639
154
1.79
Restricted interest-earning deposits with banks
12,231
95
0.78
6,323
57
0.90
Securities available for sale
10,495
269
2.56
10,977
225
2.05
Net investment in leases
(2)
936,707
84,790
9.05
880,547
82,361
9.35
Loans receivable
(2)
91,910
19,227
20.92
64,041
12,674
19.79
1,186,377
107,420
9.05
1,047,668
97,025
9.26
Non-interest-earning assets:
Cash and due from banks
5,551
5,551
Allowance for loan and lease losses
(17,905)
(15,614)
Intangible assets
7,844
2,826
Goodwill
6,887
2,727
Operating lease right-of-use assets
7,168
-
Property and equipment, net
5,067
4,134
Property tax receivables
6,990
7,491
Other assets
(3)
33,946
37,168
55,546
44,283
$
1,241,923
$
1,091,951
Interest-bearing liabilities:
Certificate of Deposits
(4)
$
836,249
$
19,999
2.39
%
$
756,571
$
13,999
1.85
%
Money Market Deposits
(4)
22,870
537
2.35
29,068
598
2.06
Long-term borrowings
(4)
111,730
4,497
4.02
75,180
2,817
3.75
970,849
25,033
2.58
860,819
17,414
2.02
Non-interest-bearing liabilities:
Sales and property taxes payable
6,308
5,796
Operating lease liabilities
8,524
-
Accounts payable and accrued expenses
26,449
18,076
Net deferred income tax liability
26,300
19,049
67,582
42,921
1,038,430
903,740
Stockholders’ equity
203,493
188,211
$
1,241,923
$
1,091,951
Net interest income
$
82,388
$
79,611
Interest rate spread
(5)
6.47
%
7.24
%
Net interest margin
(6)
6.94
%
7.60
%
Ratio of average interest-earning assets to
122.20
%
121.71
%
-50-
__________________
(1)
Average balances
were calculated using average daily balances.
(2)
Average balances
of leases and loans include non-accrual leases and loans, and are presented
net of unearned income. The
average balances of leases and loans do not include the effects of (i)
the allowance for credit losses and (ii) initial direct costs and
fees deferred.
(3)
Includes operating leases only for 2018.
(4)
Includes effect of transaction costs.
Amortization of transaction costs is on a straight-line basis, resulting
in an increased average
rate whenever average portfolio balances are at reduced levels.
(5)
Interest rate spread represents the difference between
the average yield on interest-earning assets and the average rate on interest-
bearing liabilities.
(6)
Net interest margin represents net interest income as a percentage
of average interest-earning assets.
The following table presents the components of the changes in net interest income
by volume and rate.
Year Ended December 31, 2019 Compared To
Year Ended December 31, 2018
Increase (Decrease) Due To:
Volume
(1)
Rate
(1)
Total
(Dollars in thousands)
Interest income:
Interest-earning deposits with banks
$
1,000
$
177
$
1,177
Time Deposits
78
76
154
Restricted interest-earning deposits with banks
47
(9)
38
Securities available for sale
(10)
54
44
Net investment in leases
5,141
(2,712)
2,429
Loans receivable
5,794
759
6,553
12,600
(2,205)
10,395
Interest expense:
Certificate of Deposits
1,588
4,412
6,000
Money Market Deposits
(139)
78
(61)
Long-term borrowings
1,459
221
1,680
2,421
5,198
7,619
Net interest income
$
9,989
$
(7,213)
$
2,776
__________________
(1)
Changes due to volume and rate are calculated independently for
each line item presented rather than presenting vertical
subtotals for the individual volume and rate columns.
Changes attributable to changes in volume represent changes in average
balances multiplied by the prior period’s
average rates. Changes attributable to changes in rate represent changes in
average
rates multiplied by the prior year’s average balances. Changes attributable
to the combined impact of volume and rate have
been allocated proportionately to the change due to volume
and the change due to rate.
-51-
Net interest and fee margin.
The following table summarizes the Company’s
net interest and fee income as a percentage of average
total finance receivables for the years ended December 31, 2019 and 2018.
Year Ended December 31,
2019
2018
(Dollars in thousands)
Interest income
$
107,420
$
97,025
Fee income
15,205
15,843
Interest and fee income
122,625
112,868
Interest expense
25,033
17,414
Net interest and fee income
$
97,592
$
95,454
Average total
finance receivables
(1)
$
1,028,617
$
944,588
Percent of average total finance receivables:
Interest income
10.44
%
10.27
%
Fee income
1.48
1.68
Interest and fee income
11.92
11.95
Interest expense
2.43
1.84
Net interest and fee margin
9.49
%
10.11
%
__________________
(1)
Total finance
receivables include net investment in sales-type leases and loans in 2019 and direct financing
lease and loans in
2018.
For the calculations above, the effects of (i) the allowance for credit losses and
(ii) initial direct costs and fees deferred are
excluded.
Net interest and fee income increased $2.1 million, or 2.2%, to $97.6 million for
the year ended December 31, 2019 from $95.5
million for the year ended December 31, 2018. The net interest and fee margin
was 9.49% and 10.11% for the years ended December
31, 2019 and December 31, 2018, respectively.
Interest income, net of amortized initial direct costs and fees, increased
$10.4 million, or 10.7%, to $107.4 million for the year ended
December 31, 2019 from $97.0 million for the year ended December
31, 2018. The increase in interest income was principally due to
a 8.9% increase in average total finance receivables, which increased
$84.0 million to $1,028.6 million at December 31, 2019 from
$944.6 million at December 31, 2018. The increase in average total finance
receivables was primarily due to origination volume
continuing to exceed lease and loan repayments, asset sales and charge
-offs. The weighted average implicit interest rate on new
finance receivables increased 47 basis point to 12.86% for the year ended
December 31, 2019, from 12.45% for the year ended
December 31, 2018.
Fee income decreased $0.6 million, or 3.8%, to $15.2 million for
the year ended December 31, 2019 from $15.8 million for the year
ended December 31, 2018. Fee income included approximately $8.4
million in late fee income for the year ended December 31, 2019,
which decreased 9.7%, compared to $9.3 million for the year ended December
31, 2018. Fee income also included approximately $3.7
million of net residual income the years ended December 31, 2019 and 2018.
Fee income, as a percentage of average total finance receivables, decreased
20 basis points to 1.48% for the year ended December 31,
2019 from 1.68% for the year ended December 31, 2018. Late fees remained
the largest component of fee income at 0.82% as a
percentage of average total finance receivables for the year ended December
31, 2019, compared to 0.99% for the year ended
December 31, 2018. As a percentage of average total finance receivables,
net residual income was 0.36% for the year ended December
31, 2019, compared to 0.40% for the year ended December 31, 2018.
-52-
Interest expense increased $7.6 million to $25.0 million for
the year ended December 31, 2019 from $17.4 million for the year ended
December 31, 2018. The increase was primarily due to higher rates on
higher average deposit balances and to a lesser extent to a full
year of interest expense on our term securitization that was completed in
the second half of 2018. Interest expense, as an annualized
percentage of average total finance receivables, increased 59 basis points to
2.43% for the year ended December 31, 2019, from 1.84%
for the year ended December 31, 2018. The average balance of total
interest-bearing liabilities was $970.8 million and $860.8 million
for the years ended December 31, 2019 and December 31, 2018, respectively,
and the average interest expense on those liabilities was
2.58% and 2.02% for the years ended December 31, 2019 and December 31, 2018,
respectively.
For the year ended December 31, 2019, average term securitization
outstanding was $111.7
million at a weighted average coupon of
4.02%. We
issued the term note securitization with an original balance of $201.6 million
in July 2018,
and for the year ended
December 31, 2018, average term securitization outstanding was $75.1
million at a weighted average coupon of 3.75%.
Our wholly-owned subsidiary,
MBB, serves as our primary funding source. MBB raises time deposits through
a variety of sources
including: directly from customers, through the use of on-line listing services,
and through the use of deposit brokers. At December
31, 2019, brokered certificates of deposit represented approximately 48.6%
of total deposits, while approximately 48.6% of total
deposits were obtained from direct channels, and 2.8% were in the brokered
MMDA Product.
Gain on Sale of Leases and Loans.
Gain on sale of leases and loans increased $13.8 million to $22.2 million for the year ended
December 31, 2019, from $8.4 million for the year ended December
31, 2018.
Assets sold grew to $310.4 million, for 2019
compared to $139.0 million for 2018.
We rely on the sale of finance
receivables to third parties in the capital markets as an important
source of our liquidity and use such sales to manage the size and composition
of our balance sheet and capital levels.
Our sales
execution decisions, including the timing, volume and frequency
of such sales, depend on many factors including our origination
volumes, the characteristics of our contracts versus market requirements,
our current assessment of our balance sheet composition and
capital levels, and current market conditions, among other factors.
The execution of such sales results in the derecognition of the lease
and loan assets, and the recognition of a gain (or loss) and the servicing asset and liability as applicable
on the sale date driven by the
pricing and net proceeds received;
the immediate recognition of such gain is in exchange for all future revenues from the contracts
and the transfer all risk of loss for sales without recourse and substantially all risks
of loss for sales with recourse.
Substantially all of
our asset sales to date have been without recourse.
Insurance premiums written and earned.
Insurance premiums written and earned increased $0.7 million to $8.8 million for
the year
ended December 31, 2019 from $8.1 million for the year ended
December 31, 2018, primarily due to an increase in the number of
contracts enrolled in the insurance program as well as higher average
ticket size.
Other income.
Other income increased $8.0 million to $13.0 million for the year ended
December 31, 2019 from $5.0 million for the
year ended December 31, 2018. A significant component of the increase in other
income is property tax income that was previously
netted against property tax expense for the year ended December 31, 2018, but
is presented as a separate component of revenue for the
year ended December 31, 2019, as a result of the adoption of ASU 2016-02 and related
ASUs. Selected major components of other
income for the year ended December 31, 2019 included $6.4 million
in property tax income, $2.7 million of insurance policy fees, and
$2.1 million in income from servicing revenue and fees received from referral
of leases to third parties. In comparison, selected major
components of other income for the year ended December 31, 2018
included $2.1 million of insurance policy fees, and $1.5 million in
income from servicing revenue and fees received from referral of leases to third
parties.
Salaries and benefits expense
.
The following table summarizes the Company’s
Salary and benefits expense:
Year Ended December 31,
2019
2018
(Dollars in thousands)
Salary and benefits
$
28,770
$
25,126
Commissions
6,704
5,817
Incentive compensation
8,694
8,807
Salaries and benefits
$
44,168
$
39,750
-53-
Salaries and benefits expense increased $4.4 million, or 11.1%,
for the year ended December 31, 2019 primarily due to an increase in
total personnel and increased commissions driven by increased origination
volume.
In addition, in 2019 the Company deferred $1.2
million less of salary for lease origination costs driven by the January
1, 2019 adoption of new lease accounting guidance in ASU
2016-02 that limits the deferral of certain costs.
That change in our deferral rate will continue to affect
the company on a prospective
basis.
Salaries and benefits expense, as a percentage of average total finance
receivables, was 4.29% for the year ended December 31, 2019
compared with 4.21% for the year ended December 31, 2018. Total
personnel was 348 at December 31, 2019 compared to 341 at
December 31, 2018.
General and administrative expense
.
The following table summarizes the Company’s
General and administrative expense:
Year Ended December 31,
2019
2018
(Dollars in thousands)
Property taxes
$
6,653
$
634
Occupancy and depreciation
5,492
4,419
Professional fees
4,036
3,834
Information technology
3,922
3,826
Marketing
1,744
1,857
Insurance-related
1,564
1,691
Credit bureau costs
1,532
839
Intangible amortization
929
378
FDIC Insurance fees
660
1,070
Other G&A
6,034
6,367
General and administrative
$
32,566
$
24,915
General and administrative expense increased $7.7 million, or 30.9%
for the year ended December 31, 2019. A major driver of the
increase was due to the January 1, 2019 adoption of new lease accounting guidance
in ASU 2016-02, which resulted in the gross
recognition of property tax expense that was previously netted against property
tax income in fiscal 2018, and lower deferred lease
origination costs for credit bureaus.
Those changes will continue to affect the company on a prospective
basis.
In addition, we
recognized higher intangible amortization expense in 2019 driven by our
September 2018 acquisition of FFR.
General and administrative expense as a percentage of average total finance
receivables was 3.17% for the year ended December 31,
2019, compared to 2.64% for the year ended December 31, 2018.
Provision for income taxes.
expense of $7.7 million for the year ended December 31, 2018. Our effective
tax rate, which is a combination of federal and state
income tax rates, was approximately 26.4% for the year ended December
31, 2019, compared to 23.6% for the year ended December
31, 2018. The higher effective tax rate for the year ended
December 31, 2019 is associated with changes in state statutory rates and
related revaluation of deferred tax as well as the increase of a valuation
allowance against certain net operating loss carryforwards that
are not expected to be utilized.
-54-
Operating Data
The efficiency ratio (relating expenses with revenues) and
the ratio of salaries and benefits and general and administrative expense as
a percentage of the average total finance receivables shown below measure
productivity and spending levels. Please refer to
Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Results of Operations
for additional
information regarding factors influencing these metrics.
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Average total
finance receivables
$
945,599
$
1,028,617
$
944,588
Salaries and benefits expense
33,783
44,168
39,750
General and administrative expense
30,914
32,566
24,915
Efficiency ratio
(1)
67.19
%
54.18
%
55.32
%
Percent of average total finance receivables:
3.57
%
4.29
%
4.21
%
3.27
%
3.17
%
2.64
%
________________
(1)
Represents expenses (salaries and benefits expense and general
and administrative expense) divided by the sum of net
interest and fee income and non-interest income.
We generally
reach our lessees through a network of independent equipment dealers
and, to a much lesser extent, lease brokers. The
number of dealers and brokers with whom we conduct business depends
on, among other things, the number of sales account
executives we have.
Liquidity and Capital Resources
Our business requires a substantial amount of cash to operate and grow.
Our primary liquidity need is to fund new originations. In
addition, we need liquidity to pay interest and principal on our deposits and
borrowings, to pay fees and expenses incurred in
connection with our financing transactions, to fund infrastructure and
technology investment, to pay dividends and to pay
administrative and other operating expenses.
We are dependent
upon the availability of financing from a variety of funding sources to satisfy these liquidity
needs. Historically, we
have relied upon four principal types of external funding sources for our
operations:
•
FDIC
-
insured
deposits;
•
sales
and
syndications
of
leases
and
loans;
•
borrowings
under
various
bank
facilities;
•
financing
of
leases
and
loans
in
various
warehouse
facilities
(all
of
which
have
been
repaid
in
full);
and
•
financing
of
leases
through
term
note
securitizations.
As a result
of the uncertainties
surrounding the
actual and potential
impacts of
COVID-19 on
our business and
financial condition,
in
the first quarter
of 2020 we
raised additional liquidity
through the issuance
of FDIC-insured deposits
and we increased
our borrowing
capacity
at
the
Federal
Reserve
Discount
Window.
We
have
continued
to
proactively
manage
our
funding
sources
in
response
to
changing conditions in this economic climate.
-55-
We
primarily
fund
new originations
through
the issuance
of
FDIC-insured
deposits issued
by our
wholly-owned
subsidiary,
Marlin
Business Bank
(“MBB”). MBB is
a Utah state-chartered,
Federal Reserve member
commercial bank. As
such, MBB is
supervised by
both the
Federal Reserve
Bank of
San Francisco
and the
Utah Department
of Financial
Institutions. See
further discussion
under “--
Bank Capital and
Regulatory Oversight
”.
Deposits issued by MBB
represent our primary
funding source for new
originations. MBB
receives time deposits
through a
variety of sources
including: directly
from customers, through
the use of
on-line listing services,
and
through the use of deposit brokers.
We have relied
on the sale of finance receivables to third parties in the capital markets as a potential source
of our liquidity.
Among
other attributes, the syndication program enables us to better manag
e
the overall size and composition of our portfolio in terms of
returns, credit risk and exposure to particular industries, geographies and
asset classes.
Our asset syndication program activity
decreased for the year ended December 31, 2020,
and we sold
$28.3 million of assets that generated an immediate net pre-tax gain on
sale of $2.4 million.
In comparison, for the year ended December 31, 2019,
we sold
$310.4 million of assets for pre-tax gain on sale
of
$22.2 million. The decreased syndication volume in 2020 as compared to 2019
is due to disruptions in the capital markets due to
the impact of COVID-19 pandemic on the economic environment resulting
in a lack of demand in the syndication market.
Future
levels of syndication volumes will depend on our current assessment of
our balance sheet composition, the quality and eligibility of
originated contracts versus the requirements of our counterparties, and our
ability to negotiate terms acceptable to us, among other
factors.
We continue
to service the contracts
sold, which allows us to maintain an ongoing relationship with these customers.
As of
December 31, 2020,
we were servicing a loan and lease portfolio of approximately $230 million for others.
We have $30.8
million of long-term borrowings remaining as of December 31, 2020 under an asset-backed
term note securitization
that was originated in 2018.
From other bank facilities, at December 31, 2020,
we have approximately $25.0 million of available
borrowing capacity in addition to available cash and cash equivalents
of $135.7 million. This amount excludes additional liquidity that
may be provided by the issuance of insured deposits through MBB and additional
borrowing capacity under the Federal Reserve
Discount Window.
Our debt to equity ratio was 3.87 to 1 at December 31, 2020 and 4.26 to 1
at December 31, 2019.
On October 29, 2020, Marlin Business Services Corp. declared
its thirty-seventh consecutive regular quarterly dividend. The dividend
of $0.14 per share of common stock was paid on November 19, 2020
to
holders of our common stock as of November 9, 2020.
Net cash provided by investing activities was $117.2
million for the year ended December 31, 2020,
compared to net cash used in
investing activities of $38.0 million for the year ended December
31, 2019 and $126.9 million for the year ended December 31, 2018.
The increase in cash flow from investing activities in 2020 as compared
to 2019 is primarily due to a decrease of $432.1 million in
purchases of equipment for sales-type lease contracts and funds used
to originate loans offset by a decrease of $242.2 million in
proceeds from sale of leases originated for investment and decreased principa
l
collections on leases and loans of $46.0 million.
The
increase in cash flows from investing activities from 2018 to 2019 is primarily due
to an increase of $138.6 million in proceeds from
sale of leases originated for investment and increased principal collections
on leases and loans of $40.8 million, offset by an increase
of $94.1 million in purchases of equipment for sales-type lease contracts and
funds used to originate loans.
Net cash used in financing activities was $166.8 million for the year
ended December 31, 2020,
compared to net cash used in
financing activities of $5.6 million for the year ended December 31, 2019
and net cash provided by financing activities of $86.6
million for the year ended December 31, 2018.
The decrease in cash flows from financing activities from 2019 to 2020 is primarily
due to a $192.2 million net decrease in deposits driven by lower funding
requirements for the portfolio, offset by a decrease of $28.9
million in term securitization repayments. The decrease in financing
activities from 2018 to 2019 is primarily due to the net proceeds
of $151.2 million received in 2018 from our asset backed securitization
and $74.7 million in term securitization repayments in the
current year,
offset by a $136.9 million net increase in deposits.
Additional liquidity is provided by our cash flow from operations. Net cash
provided by operating activities for the years
ended
December 31, 2020,
2019 and 2018 was $60.0 million, $62.4 million and $84.4 million, respectively.
The operating results of our
business are impacted by significant non-cash activities which include
the recognition of provision for credit losses and depreciation
and amortization, including the amortization of deferred initial direct costs and
fees.
For 2020, the operating results also included
non-cash activities related to the recognition of impairment for goodwill
and intangible assets.
We expect cash
from operations, additional borrowings on existing and future
credit facilities and funds from deposits issued through
brokers, direct deposit sources, and the MMDA Product to be adequate
to support our operations and projected growth for the next 12
months and the foreseeable future.
-56-
Total
Cash and Cash Equivalents.
Our objective is to maintain an adequate level of cash, investing any
free cash in leases and loans.
We primarily
fund our originations and growth using certificates of deposit issued through MBB. Total
cash and cash equivalents
available as of December 31, 2020 totaled $135.7 million compared to
$123.1 million at December 31, 2019.
Time Deposits with Banks.
Time deposits with banks are primarily
composed of FDIC-insured certificates of deposits that have
original maturity dates of greater than 90 days. Generally,
the certificates of deposits have the ability to redeem early,
however, early
redemption penalties
may be incurred. Total
time deposits as of December 31, 2020 and December 31, 2019 totaled $6.0 million
and
$12.9 million, respectively.
Restricted Interest-earning Deposits with Banks
.
was classified as restricted interest-earning deposits with banks consisted
of funds in a trust account related to our secured debt
facility.
Borrowings.
Our primary borrowing relationships may require the pledging
of eligible lease and loan receivables to secure amounts
advanced.
We had $30.8 million
outstanding secured borrowings at December 31, 2020 and $76.6 million
at December 31, 2019.
Borrowings outstanding consist of the following:
For the Twelve Months
Ended December 31, 2020
As of December 31, 2020
Maximum
Maximum
Month End
Average
Weighted
Weighted
Facility
Amount
Amount
Average
Amount
Average
Unused
Amount
Outstanding
Outstanding
Rate
(3)
Outstanding
Rate
(2)
Capacity
(1)
(Dollars in thousands)
Federal funds purchased
$
25,000
$
—
$
—
—
%
$
—
—
%
$
25,000
Revolving line of credit
—
—
—
—
%
—
—
%
—
Term note securitizations
(4)
—
71,721
51,913
4.38
%
30,800
3.89
%
—
$
25,000
$
51,913
$
30,800
$
25,000
__________________
(1)
Does not include MBB’s access to the
Federal Reserve Discount Window,
which is based on the amount of assets MBB chooses
to pledge. Based on assets pledged at December 31, 2020,
MBB had $50.9 million in unused, secured borrowing capacity at the
Federal Reserve Discount Window.
Additional liquidity that may be provided by the issuance of insured deposits is also excluded
from this table.
(2)
Does not include transaction costs.
(3)
Includes transaction costs.
(4)
Our term note securitizations are one-time fundings that pay down
over time without any ability for us to draw down additional
amounts.
-57-
Federal Funds Line of Credit with Correspondent Bank
.
MBB has established a federal funds line of credit with a correspondent
bank. This line allows for both selling and purchasing of federal funds. The
amount that can be drawn against the line is limited to
$25.0 million.
Federal Reserve Discount Window.
In addition, MBB has received approval to borrow from the Federal
Reserve Discount Window
based on the amount of assets MBB chooses to pledge. MBB had $50.9
million in unused, secured borrowing capacity at the Federal
Reserve Discount Window,
based on $56.7 million of net investment in leases pledged at December 31,
2020.
Term Note
Securitizations.
On July 27, 2018 we completed a $201.7 million asset-backed term
securitization. This transaction was
Marlin's eleventh term securitization and its first since 2010. It provides
the company with fixed-cost borrowing with the objective of
diversifying its funding sources.
As with all prior securitizations, this transaction was recorded as an “on-balance
sheet” transaction
and the financing is recorded in long-term borrowings in the Consolidated
Balance Sheet.
At December 31, 2020 outstanding term securitizations amounted
to $30.8 million with $76.6 million outstanding at December 31,
2019.
As of December 31, 2020, $32.9 million of minimum lease payments receivable
and $4.7 million of restricted interest-earning
deposits are assigned as collateral for the term note securitization.
The July 27, 2018, term note securitization is summarized below
:
Outstanding
Notes
Balance
Final
Original
Originally
as of
Maturity
Coupon
Issued
December 31, 2020
Date
Rate
(Dollars in thousands)
2018 — 1
$
77,400
$
—
July 2019
2.55
%
55,700
—
October 2020
3.05
36,910
—
April 2023
3.36
10,400
$9,560
May 2023
3.54
11,390
$11,390
June 2023
3.70
5,470
$5,470
July 2023
3.99
4,380
$4,380
May 2025
5.02
Total Term
Note Securitizations
$
201,650
$
30,800
3.05
%
(1)(2)
__________________
(1)
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations have other transaction costs which are amortized
over the life of the borrowings as additional
interest expense.
The weighted average coupon rate of the 2018-1 term note securitization
will approximate 3.54%
over the remaining term of the
borrowing.
At December 31, 2020,
the Company was in compliance with terms of the term note securitization agreement.
Bank Capital and Regulatory Oversight
We are subject
to regulation under the Bank Holding Company Act and all of our subsidiaries may
be subject to examination by the
Federal Reserve Board and the Federal Reserve Bank of Philadelphia even if
not otherwise regulated by the Federal Reserve Board.
MBB is also subject to comprehensive federal and state regulations dealing
with a wide variety of subjects, including minimum capital
standards, reserve requirements, terms on which a bank may engage
in transactions with its affiliates, restrictions as to dividend
payments and numerous other aspects of its operations.
These regulations generally have been adopted to protect depositors and
creditors rather than shareholders.
-58-
At December 31, 2020,
MBB’s Tier 1 leverage
ratio, common equity Tier 1 risk-based ratio, Tier
1 risk-based capital ratio and total
risk-based capital ratio exceeded the requirements for well-capitalized status.
Further, MBB exceeded the requirement
for “well
capitalized” status pursuant to the FDIC Agreement entered into
in conjunction with the opening of the bank.
At December 31, 2020,
Marlin Business Services Corp.’s Tier
1 leverage ratio, common equity Tier 1 risk based ratio,
Tier 1 risk-
based capital ratio and total risk-based capital ratio exceeded the requirements
for well-capitalized status.
See “Item 1—Supervision
and Regulation” and
Note 18—Stockholders’ Equity
in the Notes to
Consolidated Financial Statements
for
additional information regarding these ratios and our levels at December
31, 2020.
Information on Stock Repurchases
Information on Stock Repurchases is provided in “Part II, Item 5, Market for
Registrant’s Common Equity,
Related Stockholder
Matters and Issuer Purchases of Equity Securities,” herein.
Items Subsequent to December 31, 2020
The Company declared a dividend of $0.14 per share on January 28,
2021. The quarterly dividend, which amounted to a dividend
payment of approximately $1.7 million, was paid on February 18, 2021
to shareholders of record on the close of business on February
8, 2021.
It represents the Company’s thirty-eighth
consecutive quarterly cash dividend.
The
Federal
Reserve
Board
has
issued
policy
statements
which
provide
that,
as
a
general
matter,
insured
banks
and
bank
holding
companies should pay dividends
only out of current
operating earnings. Payment of
dividends by Marlin Business Services
Corp., and
by
MBB
to
Marlin
Business
Services
Corp.,
are
also
subject
to
the
regulatory
requirements
and
restricti
ons
described
in
the
“Supervision and Regulation” portion of Item 1 of Part I of this Form 10
-K.
The
payment
of future
dividends
will be
subject
to
approval
by
the
Company’s
Board
of Directors
and
will.
also
depend
upon
our
earnings, financial
condition, capital
requirements, cash
flow,
long-range plans
and such
other factors
as our
Board of
Directors may
deem relevant.
Contractual Obligations
In addition to our scheduled maturities on our deposits, we have future cash
obligations under various types of contracts. We
lease
office space and office equipment under
long-term operating leases. The contractual obligations under our certificates
of deposits,
credit facilities, operating leases, agreements and commitments under non-cancelable
contracts as of December 31, 2020 were as
follows:
Contractual Obligations as of December 31, 2020
Certificates
Contractual
of
Interest
Operating
Period Ending December 31,
Deposits
(1)
Borrowings
Payments
(2)
Leases
Total
(Dollars in thousands)
2021
$
320,093
$
22,218
$
9,895
$
896
$
353,102
2022
175,691
8,582
4,520
706
189,499
2023
98,712
—
2,037
661
101,410
2024
53,178
—
520
626
54,324
2025
29,087
—
75
656
29,818
Thereafter
—
—
—
5,155
5,155
Total
$
676,761
$
30,800
$
17,047
$
8,700
$
733,308
________________________
-59-
(1)
Money market deposit accounts are not included. As of December
31, 2020,
money market deposit accounts totaled
$52.8
million.
(2)
Includes interest on certificates of deposits and borrowings.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements requiring
disclosure at December 31, 2020.
Market Interest-Rate Risk and Sensitivity
Market risk is the risk of losses arising from changes in values of financial instruments.
We engage
in transactions in the normal
course of business that expose us to market risks. We
attempt to mitigate such risks through prudent management practices and
strategies such as attempting to match the expected cash flows of our
assets and liabilities.
We are exposed
to market risks associated with changes in interest rates and our earnings may fluctuate
with changes in interest rates.
The lease assets we originate are almost entirely fixed-rate. Accordingly,
we generally seek to finance these assets with fixed interest
certificates of deposit issued by MBB, and to a lesser extent through the variable
-rate MMDA Product at MBB.
Our earnings are sensitive to fluctuations in interest rates. Since the Company
has no outstanding variable-rate borrowings as of
December 31, 2020,
and since the Company also manages its interest rate risk by funding its fixed rate leases with fixed
rate funding
sources whenever possible, the Company’s
exposure to interest rate risk is controlled.
However, there can be no assurance that we
will be able to offset higher deposits costs with increased pricing
of our assets.
As such, the major sources of the Company’s
interest
rate risk are timing differences in the maturity and repricing
characteristics of assets and liabilities, changes in the shape of the yield
curve, changes in customer behavior and changes in relationship between
rate indices (basis risk).
We manage
and monitor our exposure to interest rate risk using balance sheet simulation models. Such
models incorporate many of
our assumptions about our business including new asset production
and pricing, interest rate forecasts, overhead expense forecasts and
assumed credit losses. Many of the assumptions we use in our simulation
models are based on past experience and actual results could
vary
substantially.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP.
Preparation of these financial statements requires us to make estimates and
judgments that affect reported amounts of assets, liabilities,
revenues and expenses and affect related disclosure
of contingent assets
and liabilities at the date of our financial statements. On an ongoing basis, we evaluate
our estimates, including credit losses, residuals,
initial direct costs and fees, other fees, the fair value of financial instruments,
insurance reserves and the realization of deferred tax
assets. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the
circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not
readily apparent from other sources. Critical accounting policies are defined
as those that are reflective of significant judgments and
uncertainties. Our consolidated financial statements are based on the selection
and application of critical accounting policies, the most
significant of which are described below.
-60-
Allowance for credit losses
.
For 2019 and prior, we maintained an
allowance for credit losses at an amount sufficient to absorb losses inherent
in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable
incurred net credit losses in accordance with the
Contingencies Topic
of the FASB ASC.
See further discussion of our policy under the incurred model in the
“Critical Accounting
Policy” section of our 2019 Form 10-K.
Effective January 1, 2020, we adopted ASU 2016
-13, Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments (“CECL”), which changed our
accounting policy and estimated allowance.
CECL replaces the
probable, incurred loss model with a measurement of expected credit
losses for the contractual term of the Company’s
current
portfolio of loans and leases.
After the adoption of CECL, an allowance, or estimate of credit losses, will be
recognized immediately
upon the origination of a loan or lease, and will be adjusted in each subsequent
reporting period
We maintain an
allowance for credit losses at an amount that takes into consideration all future cashflows
that we expect to receive or
derive from the pools of contracts, including recoveries after charge
-off, amounts related to initial direct cost and origination costs net
of fees deferred, and certain future cashflows from residual assets.
A provision is charged against earnings
to maintain the allowance
for credit losses at the appropriate level.
We developed
a consistent, systematic methodology to measure our estimate of the credit losses inherent
in our current portfolio, over
the entire life of the contracts.
We made certain
key decisions that underlie our methodology,
including our decisions of how to
aggregate our portfolio into pools for analysis based on similar risk
characteristics, the selection of appropriate historical loss data to
reference in the model, our selection of a model to calculate the estimate,
a reasonable and supportable forecast, and the length of our
forecast and approach to reverting to historical loss data.
For our Equipment Finance segment, we determine our reasonable and
supportable forecast based on certain economic variables that
were selected based on a statistical analysis of our own historical loss experience,
going back to 2004. We
selected unemployment rate
and changes in the number of business bankruptcies as our economic variables,
based on an analysis of the correlation of changes in
those variables to our loss experience over time.
As part of our estimate of expected credit losses, specific to each measurement
date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience
for the life of these contracts.
This assessment
incorporates all available information relevant to considering
the collectability of our current portfolio, including considering
economic and business conditions, default trends, changes in portfolio
composition, changes in lending policies and practices, among
other internal and external factors.
Further, each measurement period we determine
whether to separate any loans from their current
pool for individual analysis based on their unique risk characteristics. Our
approach to estimating qualitative adjustments takes into
consideration all significant current information we believe appropriate
to reflect the changes and risks in the portfolio or environment
and involves significant judgment.
Our estimates of expected net credit losses are inherently uncertain, and
as a result we cannot predict with certainty the amount of
such losses. We may
recognize credit losses in excess of our reserve, or a significant increase to our
credit loss estimate, in the future,
driven by the update of assumptions and information underlying
our estimate and/or driven by the actual amount of realized losses.
Our estimate of credit losses will be revised each period to reflect current information,
including current forecasts of economic
conditions, changes in the risk characteristics and composition of the portfolio,
and emerging trends in our portfolio, among other
factors, and these updates for current information could drive a significant
adjustment to our reserve.
Further, actual credit losses may
exceed our estimated reserve, and such excess may be significant,
if the actual performance of our portfolio differs significantly
from
the current assumptions and judgements, including those underlying our
forecast and qualitative adjustments, as of any given
measurement date.
Income taxes.
We are subject
to the income tax laws of the various jurisdictions in which we operate, including
U.S. federal, state and local
jurisdictions. These tax laws are complex and are subject to different
interpretations by the taxpayer, the relevant government
taxing
authorities, and courts.
When determining our current income tax expense, we must make judgments
about the application of these
inherently complex tax laws.
-61-
Deferred income taxes are determined using the balance sheet method.
Recognition of deferred taxes is based on the estimated future
tax effects of differences between the
financial statement and tax basis of assets and liabilities, given the provisions of the enacted
tax
laws; however, deferred tax assets are reduced
by valuation allowances if it is more likely than not that some portion of the deferred
tax asset will not be realized.
We evaluate our
deferred tax assets quarterly to determine if adjustments to our valuation allowance
are
required based on the consideration of all available evidence, using a "more likely
than not" standard with respect to whether deferred
tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which
those temporary differences become deductible.
In making this assessment, management considers the scheduled reversal of deferred
tax liabilities and projected future taxable income, the level of historical
taxable income, projections for future taxable income over the
periods which the deferred tax assets are deductible and available tax
planning strategies.
Should a change in circumstances,
including differences between our future operating
results and estimates, lead to a change in our judgments about the realization of
deferred
tax assets in future years, we would adjust the valuation allowances in the period
that the change in circumstances occurs,
along with a charge or credit to income tax expense.
We record
penalties and accrued interest related to taxes in income tax expense.
Uncertain tax positions (including interest and
penalties) are recognized when we believe it is more likely than not that the
tax position will be upheld on examination by the taxing
authorities based on merits of the position.
As of December 31, 2020 and 2019,
there are no unrecognized tax positions.
Lease residual values.
A sales-type lease is recorded at the aggregate future minimum lease payments
plus the estimated residual value less unearned income.
Residual values are established at lease inception based on our estimate of
the expected fair value of the equipment at the end of the
lease term. Residual values may be realized at lease termination from lease extensions,
sales or other dispositions of leased equipment.
These estimates are based on industry data, management’s
experience, and historical performance.
For all fair market value and fixed purchase option leases, we record an
estimated residual value at lease inception based on a
percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term. For fixed
purchase option leases, we record an estimated residual value on based on
the contractual fixed purchase price.
In setting and
reviewing estimated residual values, our analysis focuses primarily
on total historical and expected realization statistics pertaining to
sales of equipment.
At the end of an original lease term, lessees may choose to purchase the equipment,
renew the lease or return the equipment to us. We
receive income from lease renewals when the lessee elects to retain the
equipment longer than the original term of the lease.
When a
lessee elects to return equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market
value. We generally
sell returned equipment to independent third parties, rather than leasing the equipment a
second time. We
generally charge off the value of equipment
within other assets once it has been aged greater than 120 days.
Starting with the January 1, 2020 adoption of CECL, the measurement
of any expected future cashflows from residuals, including both
estimated income after the end of term or any potential gain or loss on
the sale of the asset, are included as a component of the
expected cashflows of the pool of contracts when measuring the allowance
for credit losses.
These amounts would be recognized in
the Provision for credit losses in the statement of operations.
Historical realization statistics are used to develop the estimated
cashflows from residuals,
including lease renewals and equipment sales.
Any such positive expected cashflows, would offset the
allowance for the related leases,
but limited to reducing such estimated credit losses for the pool to zero.
Any estimated cashflows that
may represent a loss in value would increase the estimate of credit loss.
Recently Adopted Accounting Standards
Information on recently issued accounting pronouncements
and the expected impact on our financial statements is provided in Note 2,
Summary of Significant Accounting Policies in the accompanying
Notes to Consolidated Financial Statements.
-62-
Item 7A.
Quantitative and Qualitative Disclosures About Market
Risk
The information appearing in the section captioned “Management’s
Discussion and Analysis of Operations and Financial
Condition — Market Interest-Rate Risk and Sensitivity” under Item 7
of this Form 10-K is incorporated herein by reference.
Item 8.
Financial Statements and Supplementary Data
Management’s Annual Report on Internal
Control over Financial Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting as
defined in Rule 13a-15(f) under the 1934 Act. The Company’s
internal control over financial reporting is designed to provide
reasonable assurance to the Company’s
management and Board of Directors regarding the preparation and fair presentation
of
published financial statements. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements.
Management has assessed the effectiveness of the
Company’s internal control over financial
reporting as of December 31, 2020.
In
making its assessment of internal control over financial reporting,
management used the criteria set forth by the Committee of
Sponsoring Organizations (“COSO”) of the Treadway
Commission in
Internal
Control — Integrated Framework (2013).
Management has concluded that, as of December 31, 2020,
the Company’s internal control over
financial reporting was effective
based on the criteria set forth by the COSO of the Treadway
Commission in
Internal Control — Integrated
Framework (2013).
The effectiveness of our internal control over financial
reporting as of December 31, 2020 has been audited by Deloitte & Touche
LLP,
an independent registered public accounting firm, as stated in their report,
which is included herein.
-63-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Marlin Business Services Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Marlin Business Services Corp. and subsidiaries (the
"Company") as of December 31, 2020, based on criteria established in
Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on
criteria established in
Internal Control – Integrated Framework (2013)
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated
financial statements as of and for the year ended December 31, 2020, of the Company and our
report dated March 5, 2021, expressed an unqualified opinion on those financial statements and included
an explanatory
paragraph regarding the Company’s adoption of accounting standards update (ASU) 2016-13:
Financial Instruments - Credit
Losses: Measurement of Credit Losses on Financial Instruments (CECL)
.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 5, 2021
-64-
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
No.
-65-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Marlin Business Services Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Marlin Business Services Corp. and subsidiaries (the
"Company") as of December 31, 2020 and 2019 the related consolidated statements of operations, comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its
operations
and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on the criteria established
in
Internal Control – Integrated Framework (2013)
Commission and our report dated March 5, 2021, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for
the
allowance for credit losses in 2020 due to the adoption of ASU 2016-13,
Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments (
“CECL”
)
.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and
are required to be independent with respect to the Company in accordance with the U.S. federal securities law and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit and risk committee and that (1) relates to
accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of a
critical audit matter does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses —Equipment Finance Portfolio Segment — Refer to Notes 2 and 7 to the consolidated
financial
statements.
Critical Audit Matter Description
-66-
Starting with the January 1, 2020 adoption of CECL, the Company recognizes an allowance, or estimate of credit losses,
immediately upon the origination of a loan or lease, and that estimate will be reassessed in each subsequent
reporting
period.
As part of its estimate of expected credit losses, specific to each measurement date, management considers relevant
qualitative and quantitative factors to assess whether the historical loss experience being referenced should be adjusted
to
better reflect the risk characteristics of the current portfolio and the expected future loss experience
for the life of these
contracts.
This assessment incorporates all available information relevant to considering the collectability of its current
portfolio, including considering economic and business conditions, default trends, changes in its portfolio composition,
changes in its lending policies and practices, among other internal and external factors.
The Company’s measurement of the allowance for credit losses specific to its Equipment Finance portfolio segment is based
on its own historical loss experience
.
T
he Company then selects certain economic variables to reference for its forecast
about the future, specifically the unemployment rate and the rate of business bankruptcies. The Company utilized probability
weighted alternate economic forecast scenarios to determine a qualitative adjustment to address the continued risks
from
the uncertainty in the pandemic-related economic environment and uncertainty of the portfolio’s performance in those
conditions.
The Company’s methodology reverts from the forecast data to its own loss data adjusted for the long-term
average of the referenced economic variables, on a straight-line basis.
Management applied judgment in developing assumptions to adjust their historical losses for the Equipment Finance portfolio
to account for changes in the economic environment, including the selection of certain economic variables to reference,
the
forecast period of such variables and the probability weighting of alternate economic forecast scenarios.
Auditing the
assumptions utilized to adjust historical losses to account for changes in the economic environment involved a high degree
of
auditor judgment and required specialized knowledge and significant effort, including the need to involve credit specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the adjustments made to adjust the Company’s historical losses for the Equipment Finance
portfolio segment within the Company’s estimate of its allowance for credit losses, included the following, among others:
●
We tested the effectiveness of management's internal controls over the allowance for credit losses, including controls
covering the key assumptions and judgments used within the calculation.
●
We evaluated the appropriateness of the methodology and the reasonableness of probability weighted alternate
economic factors and assumptions used in the allowance for credit loss calculation.
●
We evaluated the appropriateness and consistency of the methods and assumptions used by management to
develop the qualitative adjustment, including comparing actual losses
incurred to management’s historical estimates,
evaluating external economic and industry trends, and benchmarking against peers.
●
We tested the arithmetic accuracy of the allowance for credit loss calculation.
●
We involved credit specialists to assist us in evaluating the Company’s development of the Equipment Finance
portfolio segment CECL model.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
March 5, 2021
We have served as the Company’s auditor since 2005.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial
statements.
-67-
December 31,
2020
2019
(Dollars in thousands, except per-share
data)
ASSETS
Cash and due from banks
$
$
Interest-earning deposits with banks
Total cash and cash
equivalents
Time deposits with banks
Restricted interest-earning deposits related to consolidated
VIEs
Investment securities (amortized cost of $
December 31, 2020 and
December 31, 2019, respectively)
Net investment in leases and loans:
Leases
Loans
Net investment in leases and loans, excluding allowance for credit
losses
(includes $
respectively, related
to consolidated VIEs)
Allowance for credit losses
(
44,228
)
(
21,695
)
Total net investment
in leases and loans
Intangible assets
Goodwill
Operating lease right-of-use assets
Property and equipment, net
Property tax receivables
Other assets
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
$
$
Long-term borrowings related to consolidated VIEs
Operating lease liabilities
Other liabilities:
Total liabilities
Commitments and contingencies (Note 12)
Stockholders’ equity:
December 31, 2019, respectively
Total liabilities and stockholders’
equity
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial
statements.
-68-
Year Ended December 31,
2020
2019
2018
(Dollars in thousands, except per-share data)
Interest income
$
$
$
Fee income
Interest and fee income
Interest expense
Net interest and fee income
Provision for credit losses
Net interest and fee income after provision for credit losses
Non-interest income:
Non-interest expense:
Goodwill impairment
Intangible asset impairment
(
3,126
)
Income tax (benefit) expense
(
3,468
)
$
$
$
Basic earnings per share
$
$
$
Diluted earnings per share
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF COMPREHENSIVE INCOME
The accompanying notes are an integral part of the consolidated financial
statements.
-69-
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Net income
$
$
$
Other comprehensive income:
(
7
)
(
4
)
(
36
)
(
48
)
Total other comprehensive
income
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of the consolidated financial
statements.
-70-
Accumulated
Common
Additional
Other
Total
Common
Stock
Paid-In
Comprehensive
Retained
Stockholders’
Shares
Amount
Capital
Income (Loss)
Earnings
Equity
(Dollars in thousands)
Balance, December 31, 2017
$
$
$
(
96
)
$
$
(
111,910
)
(
2,908
)
(
2,908
)
Stock issued in connection with
restricted stock and RSU's, net of forfeitures
—
—
—
—
—
—
—
(
5
)
(
5
)
—
(1)
—
(
57
)
Cash dividends paid ($
—
(
7,023
)
(
7,023
)
Balance, December 31, 2018
$
$
$
(
44
)
$
$
(
317,427
)
(
3
)
(
7,320
)
(
7,323
)
Stock issued in connection with
restricted stock and RSU's, net of forfeitures
—
—
—
—
—
—
—
—
Cash dividends paid ($
—
(
6,939
)
(
6,939
)
Balance, December 31, 2019
$
$
$
$
$
(
306,291
)
(
3
)
(
4,700
)
(
4,703
)
Stock issued in connection with
restricted stock and RSU's, net of forfeitures
(
2
)
—
—
—
(2)
—
(
8,877
)
(
8,877
)
Cash dividends paid ($
—
(
6,724
)
(
6,724
)
Balance, December 31, 2020
$
$
$
$
$
(1)
Represents the impact of Accounting Standards Update ("ASU")
2016-01, ASU 2018-02 and ASU 2018-03
(2)
Represents the impact of Accounting Standards Update ("ASU")
2016-13 and related ASUs collectively referred to as "CECL".
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial
statements.
-71-
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Cash flows from operating activities:
Net income
$
$
$
(
78
)
(
104
)
(
5,197
)
(
2,426
)
(
22,210
)
(
8,363
)
(
4,383
)
(
62,371
)
(
17,436
)
(
1,435
)
(
1,746
)
(
1,574
)
(
4,717
)
Net cash provided by operating activities
Cash flows from investing activities:
(
3,268
)
(
1,549
)
(
385,487
)
(
816,834
)
(
722,745
)
(
204
)
(
246
)
(
210
)
(
2,973
)
(
5,657
)
(
1,836
)
(
10,000
)
(
1,090
)
(
512
)
(
287
)
Net cash provided by (used in) investing activities
(
38,041
)
(
126,932
)
Cash flows from financing activities:
(
109,518
)
(
53,539
)
(
45,769
)
(
74,670
)
(
50,417
)
(
194
)
(
461
)
(
4,703
)
(
7,323
)
(
2,908
)
(
6,698
)
(
6,865
)
(
6,936
)
(
1,668
)
Net cash (used in) provided by financing activities
(
166,762
)
(
5,553
)
Net increase in total cash and cash equivalents
Total cash, cash equivalents
and restricted cash beginning of period
Total cash, cash equivalents
and restricted cash end of period
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF CASH FLOWS
The accompanying notes are an integral part of the consolidated financial
statements.
-72-
2020
2019
2018
(Dollars in thousands)
Supplemental disclosures of cash flow information:
$
$
$
$
(
5,312
)
$
$
(
12,634
)
$
$
$
Supplemental disclosures of non-cash investing activities:
$
$
$
$
$
$
Reconciliation of cash, cash equivalents and restricted cash to
the consolidated
balance sheets
$
$
$
Cash, cash equivalents and restricted cash at end of period
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-73-
NOTE 1 - The Company
Marlin Business Services Corp. (the “Company”) is a nationwide provider
of credit products and services to small businesses. The
products and services we provide to our customers include loans and leases for
the acquisition of commercial equipment (including
Commercial Vehicle
Group (“CVG”) assets) and working capital loans. The Company was incorporated
in the Commonwealth of
. In
, we established AssuranceOne, Ltd., a
, wholly-owned captive
insurance subsidiary (“Assurance One”), which enables us to reinsure
the property insurance coverage for the equipment financed by
Marlin Leasing Corporation (“MLC”) and Marlin Business Bank (“MBB”)
for our small business customers. Effective
, the Company opened MBB, a commercial bank chartered by the State of
MBB serves as the Company’s primary
funding source through its issuance of Federal Deposit Insurance Corporation
(“FDIC”)-
insured deposits.
In
, we completed the acquisition of Horizon Keystone Financial (“HKF”), an equipment
leasing
company which identifies and sources lease and loan contracts for investor
partners for a fee. On
, the Company
completed the acquisition of Fleet Financing Resources (“FFR”), a leading
provider of equipment finance credit products specializing
in the leasing and financing of both new and used commercial vehicles, with an emphasis on
livery equipment and other types of
commercial vehicles used by small businesses.
References
to
the
“Company,”
“Marlin,”
“Registrant,”
“we,” “us”
and
“our” herein
refer
to
Marlin
Business
Services
Corp.
and
its
wholly-owned subsidiaries, unless the context otherwise requires.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-74-
NOTE 2 - Summary of Significant Accounting Policies
Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. The Company has
reportable segment, which includes the Company’s
commercial lending and leasing products and related services, including
equipment loans and leases, property insurance on leased equipment,
and working capital loans. All intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles in the United States (“U.S.
GAAP”) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Estimates are used when accounting for
income recognition, the residual
values of leased equipment, the
allowance for credit losses, deferred initial direct costs and fees, late fee receivables,
the fair value of financial instruments, estimated
losses from insurance program, and income taxes. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash and interest-bearing money
market funds. For purposes of the consolidated statement of cash
flows, the Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Time Deposits with Banks
Time deposits with banks are composed
of FDIC-insured certificates of deposits that generally have original
maturity dates of greater
than 90 days. These deposits are held on the balance sheet at amortized cost.
Generally, the certificates of deposits issued
directly have
the ability to redeem early; however early redemption penalties may be
incurred. The certificates of deposit issued through deposit
brokers generally do not have the ability to redeem early.
Restricted Interest-Earning Deposits with Banks
Restricted interest-earning deposits with banks consist primarily
of various interest-earning trust accounts primarily related to the
Company’s secured debt
facilities including amounts due from securitizations representing reimbursements
of servicing fees and
excess spread income.
Investments
Available for Sale.
Debt securities, available for sale include
asset-backed securities (“ABS”) and municipal bonds that are measured
at fair value on a recurring basis.
Debt securities, available for sale, are recorded at fair value, and unrealized
gains and losses, net of
tax, are reported, net of taxes, in accumulated other comprehensive income
(loss) included in stockholders’ equity unless management
determines that an investment is other-than-temporarily impaired (OTTI).
Fair value measurement is based upon quoted prices in
active markets, if available. If quoted prices in active markets are not available,
fair values are based on prices obtained from third-
party pricing vendors. See Note 15 for more information on fair value measurement
of securities.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-75-
Securities are evaluated on a quarterly basis, and more frequently when
market conditions warrant such an evaluation, to determine
whether declines in their value are other-than-temporary (OTTI). To
determine whether a loss in value is other-than-temporary,
management utilizes criteria such as the reasons underlying the decline,
the magnitude and duration of the decline and whether
management intends to sell or expects that it is more likely than not that it will be
required to sell the security prior to an anticipated
recovery of the fair value. The term “other-than-temporary” is not intended
to indicate that the decline is permanent, but indicates that
the prospects for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a realizable
value equal to or greater than the carrying value of the investment. Once a decline
in value for a debt security is determined to be
other-than-temporary,
the other-than-temporary impairment is separated into (a) the amount of the total
other-than-temporary
impairment related to a decrease in cash flows expected to be collected from the
debt security (the credit loss) and (b) the amount of
the total other-than-temporary impairment related to all other factors.
Starting with the January 1, 2020 adoption of CECL, any
amount of the total other-than-temporary impairment relating to
credit loss will be recognized as an allowance for credit losses and
will be recognized in earnings. The amount of the total other-than-temporary
impairment related to all other factors is recognized in
other comprehensive income.
Equity Securities.
Equity securities represent mutual funds that are recorded at fair value.
Net Investment in Leases and Loans
The Company uses the direct finance method of accounting to record
its sales-type leases and related interest income. At the inception
of a lease, the Company records as an asset, the aggregate future minimum lease
payments receivable, plus the estimated residual
value of the leased equipment, less unearned lease income. Residual values
are established at lease inception based on our estimate of
the expected fair value of the equipment at the end of the lease term. Residual values may be
realized at lease termination from lease
extensions, sales or other dispositions of leased equipment. Estimates are
based on industry data, management’s
experience, and
historical performance.
The Company records an estimated residual value at lease inception
for all fair market value and fixed purchase option leases based on
a percentage of the equipment cost of the asset being leased.
The percentages used depend on equipment type and term.
In setting
estimated residual values, the Company focuses its analysis primarily
on the Company’s total historical and
expected realization
statistics pertaining to sales of equipment.
At the end of an original lease term, lessees may choose to purchase the equipment,
renew the lease or return the equipment to us. We
receive income from lease renewals when the lessee elects to retain the
equipment longer than the original term of the lease.
When a
lessee elects to return equipment at lease termination, the equipment is transferred
to other assets at the lower of its basis or fair market
value. We generally
sell returned equipment to independent third parties, rather than leasing the equipment a
second time. We
generally charge off the value of equipment
within other assets once it has been aged greater than 120 days.
For 2019 and prior, the Company periodically
assessed the residual assets for impairment, and recognized subsequent
collections of
residual income after end of term, or any gain/loss on disposition of
the asset, in fee income as net residual income.
Starting with the January 1, 2020 adoption of CECL, the measurement
of any expected future cashflows from residuals, including both
estimated income after the end of term or any potential gain or loss on
the sale of the asset, are included as a component of the
expected cashflows of the pool of contracts when measuring the allowance
for credit losses.
These amounts would be recognized in
the Provision for credit losses in the statement of operations.
Historical realization statistics are used to develop the estimated
cashflows from residuals, including lease renewals and equipment
sales.
Any such positive expected cashflows, would offset the
allowance for the related leases, but limited to reducing such estimated credit losses for
the pool to zero.
Any estimated cashflows that
may represent a loss in value (or asset value measured below book value)
would increase the estimate of credit loss through the
allowance.
Loans are stated at principal balance, net of deferred fees and costs. Loan origination
fees, commitment fees and direct loan
origination costs are deferred and recognized over the life of the related loans using
an effective yield method over the period to
maturity.
Initial direct costs and fees related to lease originations are deferred as part of
the investment and amortized over the lease term.
Unearned lease income is the amount by which the total lease receivable
plus the estimated residual value exceeds the cost of the
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-76-
equipment. Unearned lease income, net of initial direct costs and fees, is recognized
as revenue over the lease term using the effective
interest method.
Allowance for Credit Losses
The Company adopted CECL, or
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on
Financial Instrument
and related amendments,
on January 1, 2020, which
resulted in significant changes to the company’s
allowance
measurement.
See further discussion under “—
Recently Adopted Accounting Standards”
.
The following allowance discussion
outlines the accounting policy under CECL as of and for the year ended
December 31, 2020 separately from the incurred loss
measurement that was effective for 2019 and years prior.
CECL Measurement – 2020.
an allowance, or estimate of credit losses for the life of
each contract,
recognized immediately upon the origination of a loan or lease, and the estimate
will be adjusted in each subsequent
reporting period.
This estimate of credit losses takes into consideration all cashflows the Company expects
to receive or derive from
the pools of contracts, including recoveries after charge
-off, amounts related to initial direct cost and origination costs net of fees
deferred, accrued interest receivable and certain future cashflows from
residual assets.
The provision for credit losses recognized in the Consolidated Statements
of Operations under CECL is primarily driven by
originations, offset by the reversal of the allowance for
any contracts sold, plus any amounts of realized cashflows, such as charge-
offs, above or below our modeled estimates, plus adjustments for
changes in estimate each subsequent reporting period.
The Company has established a systematic methodology to measure
the estimated credit losses inherent in its current portfolio, over
the entire life of the contracts, and this methodology will be consistently applied
.
The Company assesses the appropriate collective, or
pool, basis to use to aggregate its portfolio based on the existence of similar risk
characteristics and determined that its measurement
begins by separately considering segments of financing receivables,
which is similar to how it has historically analyzed its allowance
for credit losses: (i) equipment finance leases and loans; (ii) working
capital loans; (iii) commercial vehicles “CVG”; and (iv)
Community Reinvestment Act loans.
However, these classes of receivables are further
disaggregated into pools of loans based on risk
characteristics that may include: lease or loan type, origination channel,
and internal credit score (which is a measurement that
combines many risk characteristics, including loan size, external
credit scores, existence of a guarantee, and various characteristics of
the borrower’s business).
As part of our analysis of expected credit losses, we may analyze contracts
on an individual basis, or create additional pools of
contracts, in situations where such loans exhibit unique risk characteristics
and are no longer expected to
experience similar losses to
the rest of their pool.
As part of its estimate of expected credit losses, specific to each measurement
date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience
for the life of these contracts.
This assessment
incorporates all available information relevant to considering the collectability
of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio composition,
changes in its lending policies and practices, among other
internal and external factors.
Incurred Loss Method – 2019 and prior.
For the year ended December 31, 2019 and prior,
the Company maintained an allowance
for credit losses under the incurred loss method, at an amount sufficient
to absorb losses inherent in our existing lease and loan
portfolios as of the reporting dates based on our projection of probable net
credit losses.
Each segment generally considers both quantitative and qualitative factors
in determining the allowance for credit losses:
●
For the Equipment lease and loan segment,
quantitative factors include a migration analysis stratified by industry
classification,
historic delinquencies and charge-offs,
and a static pool analysis of historic recoveries. A migration analysis is a technique
used to
estimate the likelihood that an account will progress through the various delinquency
stages and ultimately charge off.
A loss
emergence period (LEP), which is the period of
time between an event that triggers the probability of a loss and the confirmation
of loss, is applied to the migration results to develop an estimate of losses inherent
in the portfolio at the reporting period.
●
For the CVG and Working
Capital loan segments,
quantitative factors include establishing a loss curve based on historical
analysis of net charge-offs.
The loss curve technique is used to estimate the likelihood and timing of when
an account will
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-77-
charge-off relative to the month in which
it was funded.
An LEP is applied to the loss curve results to develop an estimate of
losses inherent in the portfolio at the reporting period.
The CVG and Working
Capital Loans segments utilize different
assumptions for the historical charge-offs
and loss emergence which is based on analysis specific to each segment.
●
For the CRA loan segment,
quantitative factor includes the analysis of historical losses that are used in conjunction
with an LEP
to develop a quantitative allowance for credit losses.
As part of our quantitative analyses for each segment our measurement
may also consider specifically identified pools of equipment
leases or loans separately from the quantitative analysis, whenever
certain identified pools are not expected to perform consistently
with their credit characteristics or the portfolio segment as a whole. These lease and
loan pools may be analyzed for impairment
separately quantitative analysis and a specific reserve established.
Qualitative factors that may result in further adjustments to the quantitative
analyses include items such as changes in the composition
of our lease and loan portfolio segments (including geography,
industry, equipment type
and vendor source), seasonality,
economic or
business conditions and other external factors, business practices or
policies at the reporting date that are different from the periods
used in the quantitative analyses and changes in experience and ability
of leasing and lending management and other relevant staff.
The various factors used in the analysis are reviewed periodically,
and no less frequently than quarterly.
The allowance for credit
losses is then established based on this analysis for the projected probable
net credit losses inherent in the portfolio.
Goodwill and Intangible Assets
The Company tests for impairment of goodwill at least annually and more
frequently as circumstances warrant in accordance with
applicable accounting guidance. Accounting guidance
allows for the testing of goodwill for impairment using both qualitative and
quantitative factors. In the year ended December 31, 2020, the Company
completed such an analysis and recognized a full impairment
of its goodwill, as further discussed in Note 8,
Goodwill and Intangible Assets.
Currently, the
Company does not have any intangible assets with indefinite useful lives.
Intangible assets that are not deemed to have an indefinite useful life are
amortized over their estimated useful lives. The carrying
amounts of intangible assets are regularly reviewed for indicators of impairment
in accordance with applicable accounting guidance.
Impairment is recognized only if the carrying amount of the intangible
asset is in excess of its undiscounted projected cash flows.
Impairment is measured as the difference between the
carrying amount and the estimated fair value of the asset.
Leases
The Company determines if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use
(“ROU”) assets and operating lease liabilities on our consolidated balance
sheets. ROU assets and operating lease liabilities are
recognized based on the present value of the future lease payments over
the lease term at commencement date. As most of our leases
do not provide an implicit rate, in order to determine the present value of future
payments for office leases we use an incremental
borrowing rate based on the information available through real estate databases
for similar locations and for the present value of future
payments for equipment leases we use the average rate of our term note securitization
which is collateralized by similar equipment.
The ROU asset also includes any lease payments made and excludes lease incentives.
Our lease terms may include options to extend
when it is reasonably certain that we will exercise that option. Lease expense for
minimum lease payments
is recognized on a straight-
line basis over the lease term.
Property and Equipment
Property and equipment are recorded at cost. Equipment capitalized under
capital leases is recorded at the present value of the
minimum lease payments due over the lease term. Depreciation and amortization
are provided using the straight-line method over the
estimated useful lives of the related assets or lease term, whichever is shorter.
Depreciable lives generally range from three to seven
years based on equipment type.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-78-
Other Assets
Included in other assets on the Consolidated Balance Sheets are prepaid expenses,
accrued fee income,
progress payments on
equipment purchased to lease, income taxes receivable and Federal Reserve Bank
stock.
Revenue Recognition
Revenue from Contracts with Customers
,
including revenue generated from financial instruments, such as our leases and
loans, investment securities, as well as revenue related
to our gain on sale of leases and loans, servicing income, and insurance
premiums written and earned.
Revenue-generating activities
that the Company accounts for under ASC 606, which are presented in our
income statements as components of non-interest income,
include certain fees such as property tax administrative fees on leases, ACH payment
fees, insurance policy fees outside of the scope
of ASC 944, broker fees earned for referring leases and loans to other funding
partners, and other fees.
Revenue—Interest Income.
Interest income is recognized under the effective
interest method. The effective interest method of
income recognition applies a constant rate of interest equal to the internal rate
of return on each lease at inception.
Based on the historical payment behavior of the Company’s
equipment finance lease and loan portfolio as a whole, payments are
considered reasonably assured when a lease or loan’s
delinquency status is less than 90 days. Therefore, when a lease or loan is 90
days or more delinquent, the contract is classified as non-accrual and
interest income recognition is discontinued. Interest income
recognition resumes when the borrower makes payments sufficient
to bring the status to less than 90 days delinquent. Working
Capital
Loans are generally placed in non-accrual status when they are 30 days past
due and charged-off at 60 days past due. The loan
is
removed from non-accrual status once sufficient payments
are made to bring the loan current and reviewed by management.
Revenue—Fee Income.
Fee income consists of fees for delinquent lease and loan payments, cash collected
on early termination of
leases and net residual income. Net residual income includes income
from lease renewals and gains and losses on the realization of
residual values of leased equipment disposed at the end of a lease’s
term. Residual income is recognized as earned.
Fee income from delinquent lease payments is recognized on an accrual
basis based on anticipated collection rates. At a minimum of
every quarter, an analysis of anticipated
collection rates is performed based on updates to collection history.
Adjustments in the
anticipated collection rate assumptions are made as needed based on
this analysis. Other fees are recognized when received.
Revenue—Non-Interest Income.
on leases, ACH payment fees, insurance policy fees outside of the scope of
ASC 944, broker fees earned for referring leases and loans
to other funding partners, and other fees.
Insurance premiums written and earned are recognized on an accrual
basis over the term of the policy, which
is month to month.
Generally, insurance
payments that are 120 days or more past due are charged against income. Since
the policy’s premiums are
recognized month to month, there is no unearned premium on the
Consolidated Balance Sheets as these are fully recognized through
the Consolidated Statements of Operations in the month written.
Gain on sale of leases and loans is recognized in connection with the Company’s
transactions to sell populations of contracts to third
parties. When the transfer qualifies as a sale, the lease and loan assets are derecognized
and the Company recognizes any gain (or loss)
and the servicing asset and liability as applicable on the sale date driven by the pricing
and net proceeds received.
In the event the
transfer does not qualify as a sale, the transfer would be treated as a secured
borrowing.
The Company may have continuing
involvement in leases and loans sold through servicing the sold assets, or through
limited recourse provisions.
Securitizations
In connection with its term note securitization transaction, the Company
established a bankruptcy remote special-purpose subsidiary
(“SPE”) and issued term debt to institutional investors. This type of
SPE is considered a variable interest entity (“VIE”) under U.S.
generally accepted accounting principles (“GAAP”). The Company
is required to consolidate a VIE in which it is deemed to be the
primary beneficiary through having (1) power over the significant
activities of the entity and (2) an obligation to absorb losses or the
right to receive benefits from the VIE which are potentially significant to
the VIE.
The Company continues to service the assets of its
VIEs and retain equity and/or residual interests. Accordingly,
assets and related debt of these VIEs are included in the accompanying
Consolidated Balance Sheets. The Company’s
leases and restricted interest-earning deposits with banks are assigned
as collateral for
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-79-
these borrowings and there is no further recourse to our general credit.
Collateral in excess of these borrowings represents the
Company’s maximum
loss exposure.
Initial Direct Costs and Fees
We defer initial
direct costs incurred and fees received to originate our leases and loans
.
The initial direct costs and fees we defer are
part of the net investment in leases and loans and are amortized to interest income
using the effective interest method.
The January 1, 2019 adoption of ASU 2016-02,
Leases
, includes provisions that
limit the types of direct lease origination costs that
may be deferred, which may reduce prospective deferred
lease origination costs on a unit basis.
For leases originated in 2019 and
thereafter,
the costs deferred are limited to internal commissions and third party commissions.
For loans, including both equipment finance loans and working capital loans,
and for leases originated in 2018 and prior,
we defer
third-party commission costs, as well as certain internal costs directly related
to successful origination activity,
including
compensation and certain general and administrative costs. Costs subject
to deferral include evaluating each prospective customer’s
financial condition, evaluating and recording guarantees and other security
arrangements, negotiating terms, preparing and processing
documents and closing each transaction.
The fees we defer are documentation fees collected at inception. The
realization of the initial direct costs, net of fees deferred, is
predicated on the net future cash flows generated by our lease and loan portfolios.
Stock-Based Compensation
The Compensation—Stock Compensation Topic
of the FASB ASC establishes fair value
as the measurement objective in accounting
for share-based payment arrangements and requires all entities to apply
a fair-value-based measurement method in accounting
for
share-based payment transactions with employees and non-employees,
except for equity instruments held by employee share
ownership plans.
The Company measures stock-based compensation cost at grant date,
based on the fair value of the awards ultimately expected to vest.
Stock-based compensation expense is recognized on a straight-line
basis over the service period. We
generally use the Black-Scholes
valuation model to measure the fair value of our stock options and the
Monte Carlo simulation valuation model to measure the fair
value of our restricted stock units utilizing various assumptions with respect
to expected holding period, risk-free interest rates, stock
price volatility, and
dividend yield. The assumptions are based on management’s
judgment concerning future events.
The Company uses its judgment in estimating the amount of awards that are
expected to be forfeited, with subsequent revisions to the
assumptions if actual forfeitures differ from those estimates.
The vesting of certain restricted shares may be accelerated to a minimum
of three years based on achievement of various individual performance
measures. Acceleration of expense for awards based on
individual performance factors occurs when the achievement of
the performance criteria
is determined.
Non-forfeitable dividends paid on shares of restricted stock are recorded
to retained earnings for shares that are expected to vest and to
compensation expense for shares that are not expected to vest.
Income Taxes
The Company is subject to the income tax laws of the various jurisdictions in which
it operates, including U.S. federal, state and local
jurisdictions.
A consolidated federal income tax return is filed.
Depending upon the jurisdiction, the Company files consolidated or
separate legal entity state income tax returns.
Current tax expense represents the amount of taxes currently payable to
or receivable from a taxing authority plus amounts accrued for
income tax contingencies (including tax, penalty and interest). Deferred
tax expense generally represents the net change in the
deferred tax asset or liability balance during the year plus any change in the valuation
allowance, excluding any changes in amounts
recorded in Additional paid-in capital or Accumulated other comprehensive
income (loss) in the Consolidated Balance Sheets.
Deferred income taxes are determined using the balance sheet method.
Recognition of deferred taxes is based on the expected future
tax consequences of temporary differences between
the carrying amounts of assets or liabilities for book and tax purposes using the
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-80-
current enacted tax rates; however,
deferred tax assets are reduced by valuation allowances if it is more likely than
not that some
portion of the deferred tax asset will not
be realized.
We evaluate our
deferred tax assets quarterly to determine if adjustments to our
valuation allowance are required based on the consideration of all available
evidence, using a "more likely than not" standard with
respect to whether deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in which
those temporary differences become deductible.
In making this assessment, management considers the scheduled reversal of deferred
tax liabilities and projected future taxable income, the level of historical
taxable income, projections for future taxable income over the
periods which the deferred tax assets are deductible and available tax
planning strategies.
Should a change in circumstances,
including differences between our future operating
results and estimates, lead to a change in our judgments about the realization of
deferred tax assets in future years, we would adjust the valuation allowances
in the period that the change in circumstances occurs,
along with a charge or credit to income tax expense.
The Company records penalties and accrued interest related to taxes in income
tax expense. Uncertain tax positions (including interest
and penalties) are recognized when we believe it is more likely than not that the
tax position will be upheld on examination by the
taxing authorities based on merits of the position.
As of December 31, 2020 and 2019, there are
Earnings Per Share
The Company’s restricted stock
awards are paid non-forfeitable common stock dividends and thus meet
the criteria of participating
securities. Accordingly,
earnings per share (“EPS”) is calculated using the two-class method, under which
earnings are allocated to
both common shares and participating securities. All shares of restricted
stock are deducted from the weighted average shares
outstanding for the computation of basic EPS.
Diluted EPS is computed based on the weighted average number of common
shares outstanding for the period including the dilutive
impact of the exercise or conversion of common stock equivalents, such
as stock options, into shares of common stock as if those
securities were exercised or converted.
Insurance Program Deferred Acquisition Costs
Deferred acquisitions costs represent the fees paid to a third-party insurance
company.
For the years ended December 31, 2020,
2019,
and 2018, the Company recognized deferred acquisition costs and premium
taxes of $
million, $
respectively. Since
the policy’s premiums are recognized
on a month to month basis, there is
Consolidated Balance Sheet as these are fully recognized through the Consolidated
Statements of Operations in the month written.
Provision for Unpaid Losses and Loss Adjustment Expenses
The Company records a provision for insurance losses and loss adjustment expenses.
The liability for losses and loss adjustment
expenses includes an amount determined from loss reports and individual
cases and an amount, based on historical loss experience and
industry statistics, for losses incurred but not reported (“IBNR”).
These estimates are continually reviewed and are subject to the
impact of future changes in such factors as claim severity and frequency.
Loss and loss expenses are paid when advised by the third-
party insurance company.
Outstanding losses comprise estimates of the amount of reported losses and loss expenses
received from the
third-party insurance company plus a provision for losses IBNR.
IBNR is determined with the assistance of a third-party actuary.
For
the years ended December 31, 2020,
2019,
and 2018,
the Company recognized provision for unpaid losses and loss adjustment
expenses of $
million, $
Recently Adopted Accounting Standards
.
Credit Losses.
Financial Instruments - Credit Losses (Topic
326): Measurement of
Credit Losses on Financial Instruments
, which changes the methodology for evaluating impairment
of most financial instruments. The
Company adopted the guidance in ASU 2013-13, and related amendments,
collectively referred to as “CECL”, effective January 1,
2020.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-81-
CECL replaces the probable, incurred loss model with a measurement
of expected credit losses for the contractual term of the
Company’s current portfolio
of loans and leases.
Under CECL, an allowance, or estimate of credit losses, is recognized immediately
upon the origination of a loan or lease and will be adjusted in each subsequent
reporting period.
This estimate of credit losses takes
into consideration all cashflows the Company expects to receive or derive
from the pools of contracts, including recoveries after
charge-off, amounts related to initial direct cost and
origination costs net of fees deferred, accrued interest receivable and certain
future cashflows from residual assets. The Company had previously
recognized residual income within Fee Income in its Consolidated
Statements
of Operations; the adoption of CECL results in such residual income
being captured as a component of the activity of the
allowance. The Company’s
policy for charging off contracts against the allowance,
and non-accrual policy are not impacted by the
adoption of CECL.
Upon adoption on January 1, 2020, changes resulting from the application
of the new standard’s provisions were
applied as a
cumulative-effect adjustment to retained earnings
as of the beginning of the first reporting period in which the guidance is effective
(i.e., modified retrospective approach).
The adoption of this standard resulted in the following adjustment to the Company’s
Consolidated Balance Sheets:
Balance as of
Balance as of
December 31,
Adoption
January 1,
2019
Impact
2020
(Dollars in thousands)
Assets:
Net investment in leases and loans
$
$
$
Allowance for credit losses
(
21,695
)
(
11,908
)
(
33,603
)
Total net investment
in leases and loans
Liabilities:
Net deferred income tax liability
(
3,031
)
Stockholders' Equity:
Retained Earnings
(
8,877
)
See Note 7 – Allowance for Credit Losses, for further discussion of the January
1, 2020 measurement of allowance under CECL, as
well as discussion of the Company’s
current measurement.
In addition, see the Policy section earlier in this footnote for further
discussion of the Accounting Policy under CECL.
See Note 18 – Stockholders’ Equity,
for discussion of the Company’s election
to delay for two-years the effect of CECL on regulatory
capital, followed by a three-year phase-in for a five-year total transition.
In addition, as a result of adoption this standard, future measurements of
the impairment of our investment securities will incorporate
the guidance in these ASUs, including analyzing any decline in fair value between
credit quality-driven factors versus other factors.
There was
Income Taxes.
Update (“ASU”) 2019-12,
Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes
, which removes certain exceptions
to the general principles of ASC 740 in order to reduce the cost and complexity
of its application.
Among other changes, the ASU
simplifies intraperiod allocation, removes exceptions related to outside
basis differences with respect to accounting for equity method
investments and revises certain exceptions related to accounting for year
-to-date losses in interim periods.
The ASU is effective for
fiscal years beginning after December 15, 2020, with early adoption permitted.
The adoption of this new requirement will impact the
Company’s measurement
of interim taxes on a prospective basis, but is not expected to have a material effect
on the Company’s
results of operations, cash flows, or balance sheets.
Fair Value.
In August 2018, the FASB issued
ASU 2018-13,
Fair Value
Measurement (Topic
820): Disclosure Framework -
Changes to the Disclosure Requirements
for Fair Value
Measurement
which modifies the disclosures on fair value measurements by
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-82-
removing the requirement to disclose the amount and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy,
the
policy for timing of such transfers and the valuation process for Level 3
fair value measurements. The ASU expands the disclosure
requirements for Level 3 fair value measurements, primarily focused on
changes in unrealized gains and losses included in other
comprehensive income. The ASU is effective for fiscal years beginning
after December 15, 2019, with early adoption permitted. The
adoption of this new requirement impacts only footnote disclosure and
did not impact the Company’s
consolidated earnings, financial
position or cash flows.
Intangibles - Goodwill.
In August 2018, the FASB
issued ASU 2018-15,
Intangibles – Goodwill and Other – Internal-Use
Software (Subtopic 350-40): Customer’s
Accounting for Implementation Costs Incurred
in a Cloud Computing Arrangement That Is a
Service Contract
to clarify
the accounting treatment for implementation costs for cloud computing
arrangements. The ASU is effective
for fiscal years beginning after December 15, 2019, with early adoption
permitted. The adoption of this new requirement did not
impact the Company’s consolidated
earnings, financial position or cash flows.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-83-
NOTE 3 – Non-Interest Income
The following table summarizes the Company’s
non-interest income for the periods presented:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Insurance premiums written and earned
$
$
$
Gain on sale of leases and loans
Other Income
Property tax income
(1)
Servicing income
Net gains (loss) recognized during the period on equity securities
(
75
)
Non-interest income - other than from contracts with customers
Other Income
Insurance policy fees
Property tax administrative fees on leases
ACH payment fees
Referral fees
Other
Non-interest income from contracts with customers
Total non-interest income
$
$
$
__________________
(1)
After the January 1, 2019 adoption of ASU 2016-02,
Leases
, for the years ended December 31, 2020 and 2019 the Company
is recording property tax income and expense gross in the Consolidated
Statements of Operations.
For 2018, the Company
had recognized these amounts net within General and administrative expense
in the Consolidated Statements of Operations.
Note 4 – Investment Securities
The Company had the following investment securities as of the dates presented
:
December 31,
2020
2019
(Dollars in thousands)
Equity Securities
Mutual fund
$
$
Debt Securities, Available
for Sale:
Asset-backed securities ("ABS")
Municipal securities
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-84-
Equity Securities
The following schedule summarizes changes in fair value of equity securities
and the portion of unrealized gains and losses for each
period presented:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Net gains and (losses) recognized during the period on equity securities
$
$
$
(
75
)
Less: Net gains and (losses) recognized during the period
Unrealized gains and (losses) recognized during the reporting period
$
$
$
(
75
)
Available for
Sale
The following schedule is a summary of available for sale investments as of the
dates presented:
December 31, 2020
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
$
$
$
Municipal securities
(
1
)
Total Debt Securities, Available
for Sale
$
$
$
(
1
)
$
December 31, 2019
Gross
Gross
Amortized
Unrealized
Unrealized
Estimated
Cost
Gains
Losses
Fair Value
(Dollars in thousands)
ABS
$
$
$
(
3
)
$
Municipal securities
Total Debt Securities, Available
for Sale
$
$
$
(
3
)
$
The Company evaluates its available for sale securities in an unrealized loss position
for other than temporary impairment on at least a
quarterly basis. The Company did not recognize any other than temporary
impairment to earnings for each of the years ended
December 31, 2020 and December 31, 2019.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-85-
The following tables present the aggregate amount of unrealized losses on
available for sale securities in the Company’s
investment
securities classified according to the amount of time those securities
have been in a continuous loss position as of December 31, 2020
and December 31, 2019:
December 31, 2020
Less than 12 months
12 months or longer
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
Municipal securities
(
1
)
(
1
)
Total available for sale investment
securities
$
(
1
)
$
$
$
$
(
1
)
$
December 31, 2019
Less than 12 months
12 months or longer
Total
Gross
Gross
Gross
Unrealized
Fair
Unrealized
Fair
Unrealized
Fair
Losses
Value
Losses
Value
Losses
Value
(Dollars in thousands)
ABS
$
$
$
(
3
)
$
$
(
3
)
$
Total available for sale investment
securities
$
$
$
(
3
)
$
$
(
3
)
$
The following table presents the amortized cost, fair value, and weighted average
yield of available for sale investments at December
31, 2020,
based on estimated average life.
Receipt of cash flows may differ from those estimated maturities
because borrowers may
have the right to call or prepay obligations with or without penalties:
Distribution of Maturities
1 Year
Over 1 to
Over 5 to
Over
or Less
5 Years
10 Years
10 Years
Total
(Dollars in thousands)
Amortized Cost:
ABS
$
$
$
$
$
Municipal securities
Total available for sale investments
$
$
$
$
$
$
$
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-86-
NOTE 5 - Net Investment in Leases and Loans
Net investment in leases and loans consists of the following:
December 31,
2020
2019
(Dollars in thousands)
Minimum lease payments receivable
$
$
Estimated residual value of equipment
Unearned lease income, net of initial direct costs and fees deferred
(
43,737
)
(
59,746
)
Security deposits
(
385
)
(
590
)
Total leases
Commercial loans, net of origination costs and fees deferred
Working
Capital Loans
CRA
(1)
Equipment loans
(2)
CVG
Total commercial
loans
Net investment in leases and loans, excluding allowance
Allowance for credit losses
(
44,228
)
(
21,695
)
$
$
__________________
(1)
CRA loans are comprised of loans originated under a line of credit to satisfy
its obligations under the Community Reinvestment
Act of 1977.
(2)
Equipment loans are comprised of Equipment Finance Agreements, Installment
Purchase Agreements, and other loans.
In response to COVID-19, starting in mid-March 2020, the Company
instituted a payment deferral contract modification program in
order to assist our small-business customers.
See Note 7, “Allowance for Credit Losses” for discussion of that program.
At December 31, 2020, $
securitization balance and $
Federal Reserve Discount Window.
Initial direct costs and origination costs net of fees deferred were $
December 31, 2019,
respectively. Initial direct
costs are netted in unearned income and are amortized to income using the effective
interest method. Origination costs are netted in commercial loans and
are amortized to income using the effective interest method. At
December 31, 2020 and December 31, 2019, $
equipment retained on our Consolidated Balance Sheets was related
to copiers.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-87-
Leases
Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, including initial direct costs
and fees deferred, are as follows as of December 31, 2020:
Minimum Lease
Payments
Income
Receivable
(1)
Amortization
(2)
(Dollars in thousands)
Period Ending December 31,
2021
$
$
2022
2023
2024
2025
Thereafter
$
$
________________________
(1)
Represents the undiscounted cash flows of the lease payments receivable.
(2)
Represents the difference between the undiscounted
cash flows and the discounted cash flows.
The lease income recognized was as follows:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Interest Income
$
$
$
As of December 31, 2020 and December 31, 2019,
the Company maintained total finance receivables which were on a non-accrual
basis with net investment of $
had been modified under its COVID-19 payment deferral program of
$
2019,
the Company had other finance receivables in which the terms of the original agreements
had been renegotiated in the amount
of $
Note 7
“Allowance for Credit Losses” for additional discussion of loan
modifications due to COVID-19.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-88-
Portfolio Sales
The Company originates certain lease and loans for sale to third parties, based
on their underwriting criteria and specifications.
In
addition, the Company may periodically enter into agreements to sell certain leases and
loans that were originated for investment to
third parties.
For agreements that qualify as a sale where the Company has continuing
involvement through servicing, the Company recognizes a
servicing liability at its initial fair value, and then amortizes the liability over
the expected servicing period based on the effective yield
method, within Other income in the Consolidated Statements of Operations.
The Company’s sale agreements typically
do not contain
a stated servicing fee, so the initial value recognized as a servicing liability
is a reduction of the proceeds received and is based on an
estimate of the fair value attributable to that obligation.
The Company’s servicing liability
is $
December 31, 2020 and December 31, 2019,
respectively, and is recognized
within Accounts payable and accrued expenses in the
Consolidated Balance Sheets.
As of December 31, 2020 and December 31, 2019,
the portfolio of leases and loans serviced for others
was approximately $
In addition, the Company may have continuing involvement in contracts
sold through any recourse obligations that may include
customary representations and warranties or specific recourse provisions.
The Company’s expected losses from recourse
obligations is
not significant as of December 31, 2020.
The following table summarizes information related to portfolio
sales for the periods presented:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Sales of leases and loans
$
$
$
Gain on sale of leases and loans
NOTE 6 - Concentrations of Risk
As of December 31, 2020 and 2019, leases approximating
%,
% and
% of the net investment balance of leases by the Company
were located in the states of California, Texas
and Florida.
No other state accounted for more than
% of the net investment balance of
leases owned and serviced by the Company as of December 31, 2020
and December 31, 2019.
As of December 31, 2020 and
December 31, 2019, no single vendor source accounted for more
than
% of the net investment balance of leases owned by the
Company. The largest
single obligor accounted for less than
% of the net investment balance of leases owned by the Company as of
December 31, 2020 and December 31, 2019.
Although the Company’s portfolio
of leases includes lessees located throughout the
United States, such lessees’ ability to honor their contracts may be substantially
dependent on economic conditions in these states. All
such contracts are collateralized by the related equipment. The Company
leases to a variety of different industries, including the
medical, retail, service, manufacturing and restaurant industries, among
others. To the extent that the economic
or regulatory
conditions prevalent in such industries change, the lessees’ ability to honor
their lease obligations may be adversely impacted.
As of December 31, 2020 and December 31, 2019, copiers comprised
% and
%, respectively, of the estimated
residual value
of leased equipment. No other group of equipment represented more
than
% of equipment residuals as of December 31, 2020 and
December 31, 2019.
Improvements and other changes in technology could adversely impact the Company’s
ability to realize the
recorded value of this equipment. There were
2018.
As discussed further in Note 2, “Summary
of Significant Accounting Policies” starting with the January 1, 2020 adoption
of
CECL, the measurement of expected future cashflows from residuals, including
any potential gain or loss on the sale of the asset, is
part of our measurement of the allowance for that pool of contracts .
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-89-
NOTE 7 - Allowance for Credit Losses
For 2019 and prior, we maintained an
allowance for credit losses at an amount sufficient to absorb losses inherent
in our existing lease
and loan portfolios as of the reporting dates based on our estimate of probable
incurred net credit losses in accordance with the
Contingencies Topic
of the FASB ASC.
Effective January 1, 2020, we
ASU 2016-13,
Financial Instruments - Credit Losses (Topic
326): Measurement of Credit
Losses on Financial Instruments
,
probable, incurred loss model with a measurement of expected credit
losses for the contractual term of the Company’s
current
portfolio of loans and leases.
After the adoption of CECL, an allowance, or estimate of credit losses, is recognized
immediately upon
the origination of a loan or lease and will be adjusted in each subsequent reporting
period.
See further discussion of the adoption of
this accounting standard and a summary of the Company’s
revised Accounting Policy for Allowance for Credit Losses in Note 2,
Summary of Significant Accounting Policies.
Detailed discussion of our measurement of allowance under CECL as of the adoption
date and December 31, 2020 is below.
The following tables summarize activity in the allowance for credit losses:
Twelve Months Ended December 31, 2020
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, December 31, 2019
$
$
$
$
$
Adoption of ASU 2016-13 (CECL)
(1)
(
3
)
Allowance for credit losses, January 1, 2020
$
$
$
$
$
(2)
(
30,008
)
(
3,142
)
(
3,189
)
(
36,339
)
Net charge-offs
(
26,796
)
(
2,781
)
(
2,838
)
(
32,415
)
Realized cashflows from Residual Income
Allowance for credit losses, end of period
$
$
$
$
$
Net investment in leases and loans, before allowance
$
$
$
$
$
Twelve Months Ended December 31, 2019
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
$
$
$
$
(
20,328
)
(
2,868
)
(
1,875
)
(
25,071
)
(
18,164
)
(
2,531
)
(
1,746
)
(
22,441
)
Allowance for credit losses, end of period
$
$
$
$
$
Net investment in leases and loans, before allowance
$
$
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-90-
Twelve Months Ended December 31, 2018
(Dollars in thousands)
Equipment
Finance
Working
Capital
Loans
CVG
CRA
Total
Allowance for credit losses, beginning of period
$
$
$
$
$
(
18,149
)
(
1,537
)
(
907
)
(
20,593
)
(
15,950
)
(
1,477
)
(
846
)
(
18,273
)
Allowance for credit losses, end of period
$
$
$
$
$
Net investment in leases and loans, before allowance
$
$
$
$
$
__________________
(1)
The
Company
adopted
ASU
2016-13,
Financial
Instruments
-
Credit
Losses
(Topic
326):
Measurement
of
Credit
Losses
on
Financial
Instruments
, which
changed our
accounting policy
and estimated
allowance, effective
January 1,
2020.
See further
discussion in
Note 2,
“Summary of Significant Accounting Policies”, and below.
(2)
See
“Loan
Modification
Program”
section
below
for
a
summary
of
charge-offs
of
contracts
that
were
part
of
our
payment
deferral
modification program.
Estimate of Current Expected Credit Losses (CECL)
Starting with the January 1, 2020 adoption of CECL, the Company recognizes
an allowance, or estimate of credit losses, immediately
upon the origination of a loan or lease, and that estimate will be reassessed in each
subsequent reporting period.
This estimate of
credit losses takes into consideration all cashflows the Company
expects to receive or derive from the pools of contracts, including
recoveries after charge-off, amounts related
to initial direct cost and origination costs net of fees deferred, accrued interest receivable
and certain future cashflows from residual assets.
As part of its estimate of expected credit losses, specific to each measurement
date, management considers relevant qualitative and
quantitative factors to assess whether the historical loss experience
being referenced should be adjusted to better reflect the risk
characteristics of the current portfolio and the expected future loss experience
for the life of these contracts.
This assessment
incorporates all available information relevant to considering the collectability
of its current portfolio, including considering economic
and business conditions, default trends, changes in its portfolio composition,
changes in its lending policies and practices, among other
internal and external factors. As part of the analysis of expected credit
losses, we may analyze contracts on an individual basis, or
create additional pools of contracts, in situations where such loans exhibit
unique risk characteristics and are no longer expected to
experience similar losses to the rest of their pool.
Current Measurement
The Company selected a vintage loss model as the approach to estimate and measure
its expected credit losses for all portfolio
segments and for all pools, primarily because the timing of the losses realized has been
consistent across historical vintages, such that
the company is able to develop a predictable and reliable loss curve for each
separate portfolio segment.
The vintage model assigns
loans to vintages by origination date, measures our historical average
actual loss and recovery experience within that vintage, develops
a loss curve based on the averages of all vintages, and predicts (or forecasts) the
remaining expected net losses of the current portfolio
by applying the expected net loss rates to the remaining life of each open vintage.
Additional detail specific to the measurement of each portfolio segment
under CECL as of January 1, 2020 and December 31, 2020,
is
summarized below.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-91-
Equipment Finance:
Equipment Finance consists of Equipment Finance Agreements, Installment
Purchase Agreements and other leases and loans.
The risk characteristics referenced to develop pools of Equipment
Finance leases and loans are based on internally developed
credit score ratings, which is a measurement that combines many
risk characteristics, including loan size, external credit
scores, existence of a guarantee, and various characteristics of the borrower’s
business.
In addition, the Company separately
measured a pool of true leases so that any future cashflows from residuals
could be used to partially offset the allowance for
that pool.
The Company’s measurement
of Equipment Finance pools is based on its own historical loss experience.
The Company
analyzed the correlation of its own loss data from 2004 to 2019 against various
economic variables in order to determine an
approach for reasonable and supportable forecast.
The Company then selected certain economic variables to reference for
its
forecast about the future, specifically the unemployment rate and number
of business bankruptcy filings.
The Company’s
methodology reverts from the forecast data to its own loss data adjusted for
the long-term average of the referenced economic
variables, on a straight-line basis.
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, the Company utilized a 12-month forecast period
and 12-month straight-
line reversion period, based on its initial assessment of the appropriate timing.
However, starting with the March 31, 2020
measurement,
the Company adjusted its model to reference a 6-month forecast period and
12-month straight line reversion
period.
The change in the length of the reasonable and supportable forecast was based on observed
market volatility in late
March,
and the Company continues to reference a 6-month forecast period at December 31, 2020
due to continuing
uncertainty of the duration and level of impact of the COVID-19 virus on
the macroeconomic environment and the
Company’s portfolio, including
uncertainty about the forecasted impact of COVID-19 that was underlying
its economic
forecasted variables beyond a 6-month period.
In particular, the economic forecast as of December
31, 2020 reflects
a
significant improvement in outlook, especially for the business bankruptcy
variable referenced by our model.
The Company
believed that the model estimate after applying this standard forecast did
not properly reflect all of the continued risks to our
portfolio related to the current economic climate.
The Company utilized alternate economic forecast scenarios, and
probability weighted potential outcomes, to determine a qualitative adjustment
of a $
address the continued risks to our portfolio from the pandemic-related
economic climate.
In addition, the estimate of credit
loss includes a $
probability of default of that receivable pool, and a recent average
loss if default.
The $
of credit losses for new originations, and $
elevated risks to the portfolio from the COVID-19 pandemic.
Working Capital:
The risk characteristics referenced to develop pools of Working
Capital loans is based on origination channel, separately
considering an estimation of loss for direct-sourced loans versus loans that were
sourced from a broker. The Company’s
historical relationship with its direct-sourced customers typically results in
a lower level of credit risk than loans sourced
from brokers where the Company has no prior credit relationship with the
customer.
The Company’s measurement
of Working
Capital pools is based on its own historical loss experience.
The Company’s
Working
Capital loans typically range from 6 – 12 months of duration. For this portfolio segment,
due to the short contract
duration, the Company did not define a standard methodology to adjust
its loss estimate based on a forecast of economic
conditions.
However, the Company will continually assess through
a qualitative adjustment whether there are changes in
conditions and the environment that will impact the performance of
these loans that should be considered for qualitative
adjustment.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-92-
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
of current expected credit losses for the remaining life of its
portfolio.
As of the January 1, 2020 adoption date, there was no qualitative adjustment to the Working
Capital portfolio.
However, starting with its March 31, 2020
measurement, driven by the elevated risk of credit loss driven by market
conditions due to COVID-19, the Company developed alternate
scenarios for credit loss based on an analysis of the
characteristics of its portfolio,
considering different timing and magnitudes of potential
exposures.
As of
December 31,
2020, the working capital reserve includes a $
from the pandemic-related economic climate.
The $
credit losses for new originations, and $
elevated risks to the portfolio from the COVID-19 pandemic.
Commercial Vehicle
Group (CVG):
The Company’s measurement
of transportation-related leases and loans (CVG) is based on a combination
of its own
historical loss experience and industry loss data from an external source. The
Company has limited history of this product,
and therefore the Company determined it was appropriate to develop
an estimate based on a combination of internal and
industry data.
Due to the Company’s limited history
of performance of this segment, and the limited size of the portfolio, the
Company did not develop a standard methodology to adjust its loss estimate based
on a forecast of economic conditions.
However, the Company will continually
assess through a qualitative adjustment whether there are changes in conditions and
the environment that will impact the performance of these loans that should
be considered for qualitative adjustment.
At each reporting date, the Company considers current conditions, including
changes in portfolio composition or the business
environment, when determining the appropriate measurement
for the remaining life of the current portfolio.
As of the
January 1, 2020 adoption date, there were no qualitative adjustment to the CVG portfolio.
However, starting with the March
31, 2020 measurement, driven by the elevated risk of credit loss driven by market
conditions due to COVID-19, the
Company developed alternate scenarios for expected credit loss for
this segment, considering different timing and
magnitudes of potential exposures.
As of
December 31, 2020, the CVG reserve includes a $
adjustment to address the continued risks to our portfolio from the pandemic
-related economic climate.
In addition, the Company separately assessed the elevated risks of a pool
of motor coach industry (travel/transportation)
contracts that are facing prolonged impacts from COVID-19.
As of December 31, 2020, the $
this population were assessed as collateral-dependent, as the operation
or sale of the vehicle collateral is expected to provide
for the repayment of the receivable and the borrowers are experiencing financial
difficulty.
For this population, the $
million total reserve as of December 31, 2020 is based on the difference
between (i) the estimated the fair value of the
underlying vehicle collateral less costs to sell; and (ii) the amortized cost of the receivable,
and these receivables were put on
non-accrual.
There were
The $
for new originations, and $
portfolio from the COVID-19 pandemic.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-93-
Community Reinvestment Act (CRA) Loans:
CRA loans are comprised of loans originated under a line of credit to satisfy the
Company’s obligations under the CRA.
The
Company does not measure an allowance specific to this population because
the exposure to credit loss is nominal.
The COVID-19 pandemic, business shutdowns and impacts to our
customers, is still ongoing, and the extent of the effects of the
pandemic on our portfolio depends on future developments, which
are highly uncertain and are difficult to predict.
Further, the
Company instituted a Loan modification payment deferral program,
as discussed further below, to give
payment relief to customers
during this period.
As of December 31, 2020,
the ultimate performance of loans modified under that program remains
uncertain, due
to the timing of the modified loans resuming payment. Our reserve as of
December 31, 2020,
and the qualitative and economic
adjustments discussed above, were calculated referencing our historical
loss experience, including loss experience through the 2008
economic cycle, and our adjustments to that experience based on our
judgements about the extent of the impact of the COVID-19
pandemic.
Those judgements include certain expectations for the extent and timing of
impacts from COVID-19 on unemployment
rates and business bankruptcies and are based on our current expectations
of the performance of our portfolio in the current
environment.
We may recognize credit
losses in excess of our reserve, or revise our estimate of credit losses in the future, and
such
amounts may be significant, based on (i) the actual performance of our portfolio,
including the performance of the modified portfolio,
(ii) any further changes in the economic environment, or (iii) other
developments or unforeseen circumstances that impact our
portfolio.
Loan and Lease Modification Program:
In response to COVID-19, starting in mid-March 2020, the Company
instituted a payment deferral program in order to assist its small-
business customers that requested relief and were current under their
existing agreement.
The below table outlines certain data on the
modified population with details of count and net investment balance,
with all information as of December 31, 2020.
Equipment
Working
(Dollars in thousands)
Finance
CVG
Capital
Total
Population Summary:
Modified Contracts, out of deferral period
$
$
$
$
Extended modifications of Loans in fourth quarter
Extended modifications of Leases in fourth quarter
Total Modifications,
Net investment receivable
$
$
$
$
% of total segment receivables
Total
Program, number of contracts:
Active modified leases and loans receivable
(count)
Resolved by payoff
Resolved by charge-off
Resolved Population:
Charge-offs of modified contracts, for the
year ended December 31, 2020
$
$
$
$
Modifications 30+ Days Delinquent:
Modified Contracts
$
$
$
$
TDR and Extended Modifications
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-94-
The Company’s initial deferral
program in response to COVID-19 extended through September
30, 2020, and in accordance with the
interagency guidance, loans modified were not considered
TDRs and followed the Company’s
general non-accrual policies with
respect to their modified terms.
This program allowed for up to 6 months of fully deferred or reduced payments.
As of December 31,
2020, these contracts totaled $
% of our total modified contracts, and are out of the deferral period.
In the fourth quarter of 2020, the modification period of contracts was generally
extended only as part of our loss mitigation strategies
for customers with prolonged negative impacts from the pandemic.
These extended deferrals totaled $
2020, or
% of the modified population, and the extensions generally consisted of requiring
a partial payment of
% to
% of the
original schedule, with full payment scheduled to resume in the first quarter
for
% of the population, and the remainder in the
second quarter of 2021.
The Company evaluated these extended deferrals on a program basis and concluded
that these deferrals are
beyond a short-term period,
the deferrals were due to the borrower’s financial difficulties, and
the payment deferrals are a concession.
The loan contracts were assessed as troubled debt restructurings and
were put on non-accrual, and the extended lease contracts were
also put on non-accrual.
The estimate of increased risk of credit loss for these contracts was assessed as discussed
with the qualitative
adjustments above.
There were
As of December 31, 2019, the Company did
t have any TDRs.
Credit Quality
At origination, the Company utilizes an internally developed credit
score ratings as part of its underwriting assessment and pricing
decisions for new contracts.
The internal credit score is a measurement that combines many risk characteristics,
including loan size,
external credit scores, existence of a guarantee, and various characteristics
of the borrower’s business.
The internal credit score is
used to create pools of loans for analysis in the Company’s
Equipment Finance portfolio segment, as discussed further above.
We
believe this segmentation allows our loss modeling to properly reflect
changes in portfolio mix driven by sales activity and
adjustments to underwriting standards.
However, this score is not updated after origination
date for analyzing the Company’s
provision.
On an ongoing basis, to monitor the credit quality of its portfolio, the
Company primarily reviews the current delinquency of the
portfolio and delinquency migration to monitor risk and default trends
.
We believe that
delinquency is the best factor to use to monitor
the credit quality of our portfolio on an ongoing basis because it reflects the
current condition of the portfolio, and is a good predictor
of near term charge-offs and can help with identifying
trends and emerging risks to the portfolio.
The following tables provide information about delinquent leases and loans
in the Company’s portfolio
based on the contract’s status
as-of the dates presented. In particular, contracts
that are part of the Loan Modification Program discussed above are presented
in the
below delinquency table and the non-accrual information for December
31, 2020 based on their status with respect to the modified
terms. See Loan Modification section above for delinquency data
specific to the modified portfolio.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-95-
Portfolio by Origination Year as of
December 31, 2020
Total
2020
2019
2018
2017
2016
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
$
$
$
$
$
$
60-89
90+
Total Past Due
Current
Total
Working Capital
30-59
60-89
90+
Total Past Due
Current
Total
CVG
30-59
60-89
90+
Total Past Due
Current
Total
CRA
Total Past Due
Current
Total
Net investment in leases
and loans, before
allowance
$
$
$
$
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-96-
Portfolio by Origination Year as of
December 31, 2019
Total
2019
2018
2017
2016
2015
Prior
Receivables
(Dollars in thousands)
Equipment Finance
30-59
$
$
$
$
$
$
$
60-89
90+
Total Past Due
Current
Total
Working Capital
30-59
60-89
90+
Total Past Due
Current
Total
CVG
30-59
60-89
90+
Total Past Due
Current
Total
CRA
Total Past Due
Current
Total
Net investment in leases
and loans, before
allowance
$
$
$
$
$
$
$
Net investments in Equipment Finance and CVG leases and loans are generally
charged-off when they are contractually past due
for
120 days or more.
Income recognition is discontinued when a default on monthly payment exists for
a period of 90 days or more.
Income recognition resumes when a lease or loan becomes less than 30
days delinquent.
At December 31, 2020 and December 31,
2019, there were
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-97-
Working
Capital Loans are generally placed in non-accrual status when they are 30 days past due
and generally charged-off at 60 days
past due.
The loan is removed from non-accrual status once sufficient payments
are made to bring the loan current and reviewed by
management. At December 31, 2020 and December 31, 2019, there
were
accruing.
The following table provides information about non-accrual leases and loans:
December 31,
December 31,
(Dollars in thousands)
2020
2019
Equipment Finance
$
$
Working
Capital Loans
CVG
Total
Non-Accrual
$
$
As of December 31, 2020, non-accrual includes $
modification program, or $
total is $
troubled.
See further information on the extended modifications in the Loan Modification section.
NOTE 8 - Goodwill and Intangible
Assets
Goodwill
The Company’s goodwill balance
of $
HKF, in January
2017, and $
purchase price over the Company’s
fair value of the assets acquired and is not amortizable but is deductible for tax purposes.
The Company assigns its goodwill to a single, consolidated reporting
unit, Marlin Business Services Corp. In the first quarter of 2020,
events or circumstances indicated that it was more likely than not
that the fair value of its reporting unit was less than its carrying
amount, driven in part by market capitalization of the Company falling
below its book value, and negative current events that impact
the Company related to the COVID-19 economic shutdown.
The Company calculated the fair value of the reporting unit, by taking
the average stock price over a reasonable period of time multiplied by
shares outstanding as of March 31, 2020 and then further
applying a control premium, and compared it to its carrying amount,
including goodwill.
The Company concluded that the implied
fair value of goodwill was less than its carrying amount, and recognized
impairment equal to the $
Consolidated Statements of Operations.
The changes in the carrying amount of goodwill for the twelve-month period
ended December 31, 2020 are as follows:
(Dollars in thousands)
Total Company
Balance at December 31, 2019
$
Impairment of Goodwill
(
6,735
)
Balance at December 31, 2020
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-98-
Intangible assets
The following table presents details of the Company’s
intangible assets:
Gross
Carrying
Accumulated
Net Book
Useful Life
Amount
Amortization
Value
As of December 31, 2020
(Dollars in thousands)
Vendor
relationships
years
Corporate trade name
years
Total
$
$
$
As of December 31, 2019
Lender relationships
to
years
$
$
$
Vendor
relationships
years
Corporate trade name
years
Total
$
$
$
(Dollars in thousands)
FFR
HKF
Total
Beginning Balance, December 31, 2019
$
$
$
Amortization Expense
(
674
)
(
93
)
(
767
)
Impairment
(
1,016
)
(
1,016
)
Ending Balance, December 31, 2020
$
$
$
The Company’s intangible
assets consist of definite-lived assets in connection with the January 2017 acquisition
of HKF, and definite-
lived intangible assets in connection with the September 2018 acquisition
of FFR. The Company has no indefinite-lived intangible
assets.
In the third quarter of 2020, the Company determined that a decrease in projected
volumes for its FFR business and a decrease in the
sales team that supports that business resulted in a triggering event that warranted
a review of the recoverability of the related vendor
relationship and lender relationship intangible assets.
Those assets were evaluated as separate asset groups, as they generate
independent cashflows, such that the vendor relationships relate to the
origination of contracts and the lender relationships relate to the
sale or syndication of contracts.
The estimate of fair value was modeled based on an expected cashflow
analysis.
As a result of those
analyses, there was
impairment for the FFR lender relationship intangible. This impairment
is reflected in Intangible impairment in the Consolidated
Statement of Operations.
Amortization related to the Company’s
definite lived intangible assets was $
ended December 31, 2020 and December 31, 2019, respectively.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-99-
The Company expects the amortization expense for the next five years
will be as follows:
(Dollars in thousands)
Amortization
Expense
2021
$
2022
2023
2024
2025
NOTE 9 - Property and Equipment, Net
Property and equipment, net consist of the following:
December 31,
2020
2019
Depreciable Life
(Dollars in thousands)
Furniture and equipment
$
$
years
Computer systems and equipment
to
years
Leasehold improvements
Total property
and equipment
Less - Accumulated depreciation and amortization
(
19,759
)
(
18,283
)
Property and equipment, net
$
$
Depreciation and amortization expense was $
2020, 2019 and 2018, respectively.
NOTE 10 - Other Assets
Other assets are comprised of the following:
December 31,
2020
2019
(Dollars in thousands)
Accrued fees receivable
$
$
Prepaid expenses
Federal Reserve bank stock
Other
Total
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-100-
NOTE 11 – Leases
The Company determines if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use
recognized based on the present value of the future lease payments over
the lease term at commencement date. As most of our leases
do not provide an implicit rate, in order to determine the present value of future
payments for office leases we use an incremental
borrowing rate based on the information available through real estate databases
for similar locations and for the present value of future
payments for equipment leases we use the average rate of our term note securitization
which is collateralized by similar equipment.
The ROU asset also includes any lease payments made and excludes lease incentives.
Our lease terms may include options to extend
when it is reasonably certain that we will exercise that option. Lease expense for
minimum lease payments is recognized on a straight-
line basis over the lease term.
As of December 31, 2020,
ROU asset and lease liability for one office lease whose term is twelve months
or less and is considered a short-term lease.
and lease liabilities as the Company is not reasonably certain to exercise
these options. The Company has also entered into two leases
for office equipment for which ROU assets and lease liabilities have
been recognized. All the aforementioned leases have been
accounted for as operating leases.
The components of lease expense were as follows:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Operating lease cost
$
$
$
Finance lease costs
Short-term lease cost
Total lease cost
$
$
$
The Company
adopted ASU
2016-02,
Leases
, on
January 1,
2019, which
requires the
Company to
recognize right-of
-use assets
and
lease liabilities on its Consolidated Balance Sheets, as follows:
Year Ended December 31,
2020
2019
(Dollars in thousands)
Operating lease right-of-use assets
$
$
Operating lease liabilities
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-101-
Other information related to the Company’s
leases follows:
As of
December 31,
2020
2019
Weighted average
remaining lease term
years
years
Weighted average
discount rate
%
%
Year Ended December 31,
2020
2019
(Dollars in thousands)
Cash payments for operating lease liabilities, included in operating cash flows
$
$
Right-of-use assets obtained in exchange for new operating lease obligations
Maturities of lease liabilities are as follows:
Operating
Leases
Period
Ending December 31,
(Dollars in thousands)
2021
$
2022
2023
2024
2025
Thereafter
Total lease payments
$
Less: imputed interest
(
1,680
)
Total
$
NOTE 12 - Commitments and Contingencies
MBB is a member bank in a non-profit, multi-financial institution Community
Development Financial Institution (“CDFI”)
organization. The CDFI serves as a catalyst for community development
by offering flexible financing for affordable, quality hous
ing
to low- and moderate-income residents, helping MBB meet its Community
Reinvestment Act (“CRA”) obligations. Currently,
MBB
receives a range of approximately
% to
% participation in each funded loan which is collateral for the loan issued to the CDFI
under the program. MBB records loans in its financial statements when
they have been funded or become payable. Such loans help
MBB satisfy its obligations under the Community Reinvestment
Act of 1977. At December 31, 2020 and December 31, 2019,
MBB
had an unfunded commitment of $
CDFI will expire in August 2021 at which time the commitment may
be renewed for another year based on the Company’s
discretion.
The Company is involved in legal proceedings, which include claims, litigation
and suits arising in the ordinary course of business. In
the opinion of management, these actions will not have a material effect
on the Company’s consolidated
financial position, results of
operations or cash flows.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-102-
NOTE 13 - Deposits
MBB serves as the Company’s primary
funding source. MBB issues fixed-rate FDIC-insured certificates of deposit
raised nationally
through various brokered deposit relationships and fixed-rate FDIC-insured
deposits received from direct sources. MBB offers FDIC-
insured money market deposit accounts (the “MMDA Product”) through
participation in a partner bank’s
insured savings account
product. This brokered deposit product has a variable rate, no maturity date
and is offered to the clients of the partner bank and
recorded as a single deposit account at MBB. As of December 31, 2020,
money market deposit accounts totaled $
As of December 31, 2020, the remaining scheduled maturities of certificates
of deposits are as follows:
Scheduled
Maturities
(Dollars in thousands)
Period Ending December 31,
2021
$
2022
2023
2024
2025
$
Certificates of deposits issued by MBB are time deposits and are generally issued
in denominations of $
Product is also issued to customers in amounts less than $
. The FDIC insures deposits up to $
weighted average all-in interest rate of deposits outstanding at December
31, 2020 was
%.
NOTE 14 – Debt and Financing Arrangements
Short-Term
Borrowings
The Company had a secured, variable rate revolving line of credit in the amount
of
$
November 20, 2020. The line of credit was terminated by mutual agreement
with the line of credit provider in July 2020
.
Long-Term
Borrowings
Borrowings with an original maturity date of one year or more are
classified as long-term borrowings. The Company’s
term note
securitizations are classified as long-term borrowings.
The Company’s long-term
borrowings consisted of the following:
December 31,
2020
2019
(Dollars in thousands)
Term securitization
2018-1
$
$
Unamortized debt issuance costs
(
135
)
(
472
)
$
$
On July 27, 2018 the Company completed a $
securitization has a fixed term, fixed interest rate and fixed principal amount.
At December 31, 2020, outstanding term securitizations
amounted to $
of restricted interest-earning deposits.
The July 27, 2018 term note securitization is summarized below:
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-103-
Outstanding
Notes
Balance
Final
Original
Originally
as of
Maturity
Coupon
Issued
December 31, 2020
Date
Rate
(Dollars in thousands)
2018 — 1
$
$
%
Total Term
Note Securitizations
$
$
%
(1)(2)
__________________
(1)
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term note securitizations have other transaction costs which are amortized
over the life of the borrowings as additional
interest expense.
The weighted average coupon rate of the 2018-1 term note securitization
will approximate
% over the remaining term of the
borrowing.
Federal Funds Line of Credit with Correspondent
Bank
MBB has established a federal funds line of credit with a correspondent
bank. This line allows for both selling and purchasing of
federal funds. The amount that can be drawn against the line is limited to $
were
Federal Reserve Discount Window
In addition, MBB has received approval to borrow from the Federal Reserve
Discount Window based on the amount of assets MBB
chooses to pledge. MBB had $
$
Maturities
Based on current expected cashflows of leases underlying our term note
securitization, principal and interest payments are estimated
as of December 31, 2020 as follows:
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-104-
Principal
Interest
(Dollars in thousands)
Period Ending December 31,
2021
$
$
2022
$
$
NOTE 15 - Fair Value
Measurements and Disclosures about the Fair
Value of Financial
Instruments
Fair Value
Measurements
Fair value is defined in GAAP as the price that would be received to sell an asset or the price that
would be paid to transfer a liability
on the measurement date. GAAP focuses on the exit price in the principal
or most advantageous market for the asset or liability in an
orderly transaction between market participants. A three-level valuation
hierarchy is required for disclosure of fair value
measurements based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The fair value
hierarchy gives the highest priority to quoted prices (unadjusted) in active
markets for identical assets or liabilities (Level 1) and the
lowest priority to unobservable inputs (Level 3). The level in the fair value
hierarchy within which the fair value measurement in its
entirety falls is determined based on the lowest level input that is significant
to the measurement in its entirety.
Recurring Fair Value
Measurements
The Company’s balances measured
at fair value on a recurring basis include the following as of December 31, 2020
and 2019:
December 31, 2020
December 31, 2019
Fair Value Measurements Using
Fair Value Measurements Using
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
(Dollars in thousands)
Assets: Investment Securities
ABS
$
$
$
—
$
$
$
—
Municipal securities
—
—
Mutual fund
—
—
At this time, the Company has not elected to report any assets and liabilities
using the fair value option. There have been
between Level 1 and Level 2 of the fair value hierarchy for any of the periods
presented.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-105-
Non-Recurring Measurements
Non-recurring fair value measurements include assets and liabilities that
are periodically remeasured or assessed for impairment using
Fair value measurements. Non-recurring measurements include the Company’s
evaluation of goodwill and intangible assets for
impairment, the remeasurement of contingent consideration liability,
the measurement of the allowance for credit losses for collateral-
dependent contracts, and assessment of the carrying amount of its servicing
liability.
For the year ended December 31, 2020, the Company recognized
$
impairment of intangible assets, as discussed further in Note 8, Goodwill
and Intangible Assets.
In addition, for the year ended
December 31, 2020,
the Company updated its fair value measurement of contingent consideration liability
in connection with the 2018
FFR acquisition due to lower forecasted volumes for that business, resulting
in a $
recognized as a reduction in General and administrative expense.
For the year ended December 31, 2020,
the Company’s allowance
for credit losses includes $
sell, versus the amortized cost of the related pool of receivables.
See Note 7, Allowance for Credit Losses, for further detail.
For the year ended December 31, 2019, the Company recognized
$
the Consolidated Statements of Operations in connection with non-recurring
fair value measurements. For the year ended December
31, 2018,
there were no significant amounts recognized in the Consolidated Statements
of Operations in connection with non-
recurring fair value measurements.
Fair Value
of Other Financial Instruments
The following summarizes the carrying amount and estimated fair
value of the Company’s other financial
instruments, including those
not measured at fair value on a recurring basis:
December 31, 2020
December 31, 2019
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(Dollars in thousands)
Financial Assets
Cash and cash equivalents
$
$
$
$
Time deposits with banks
Restricted interest-earning deposits
Net investment in loans, net of allowance
Other Assets: Federal Reserve Bank Stock
Financial Liabilities
Deposits
$
$
$
$
Long-term borrowings
The fair values shown above have been derived, in part, by management’s
assumptions, the estimated amount and timing of future
cash flows and estimated discount rates. Valuation
techniques involve uncertainties and require assumptions and judgments regarding
prepayments, credit risk and discount rates. Changes in these assumptions
will result in different valuation estimates. The fair values
presented would not necessarily be realized in an immediate sale. Derived
fair value estimates cannot necessarily be substantiated by
comparison to independent markets or to other companies’ fair value
information.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-106-
The paragraphs which follow describe the methods and assumptions
used in estimating the fair values of financial instruments.
Cash and Cash Equivalents
.
The carrying amounts of the Company’s
cash and cash equivalents approximates
fair value, because
they bear interest at market rates and had maturities of less than 90 days
at the time of purchase. The cash equivalents include a money
market fund with a balance of $
million that the Company considers operating cash and has no reportable gross
unrealized gains or
losses. This fair value measurement of cash and cash equivalents is classified as Level
1.
Time Deposits with Banks.
Fair value of time deposits is estimated by discounting cash flows of current
rates paid by market
participants for similar time deposits of the same or similar remaining
maturities. This fair value measurement is classified as Level 2.
Restricted Interest-Earning Deposits.
Interest-earning deposits earn a floating rate of market interest which
results in a fair value
approximating the carrying amount. This fair value measurement is classified as Level
1.
Loans.
The Company’s loan portfolio
is comprised of Equipment Loans, Working
Capital loans, and loans under the Community
Reinvestment Act of 1977 (“CRA”).
Fair value of Equipment loans is estimated by discounting the future cash flows
using the current rate at which similar loans would
be made to borrowers with similar credit, collateral, and for the same remaining
maturities.
This fair value measurement is
classified as Level 2.
Fair value for Working
Capital loans is estimated by discounting cash flows at an imputed market
rate for similar loan products
with similar characteristics. This fair value measurement is classified as Level 2.
Fair value of CRA loans approximates the carrying amount at December
31, 2020 and December 31, 2019 as it is based on recent
comparable sales transactions with consideration of current market
rates. This fair value measurement is classified as Level 2.
Federal Reserve Bank Stock.
Federal Reserve Bank Stock are non-marketable equitable equity securities and
are reported at their
redeemable carrying amounts, which approximates fair value. This
fair value measurement is classified as Level 2.
Deposits.
Deposit liabilities with no defined maturity such as MMDA deposits have
a fair value equal to the amount payable on
demand at the reporting date (i.e., their carrying amount). Fair value for
certificates of deposits is estimated by discounting cash flows
at current rates paid by the Company for similar certificates of deposit of the
same or similar remaining maturities. This fair value
measurement is classified as Level 2.
Long-Term
Borrowings.
The fair value of the Company’s
secured borrowings is estimated by discounting cash flows at indicative
market rates applicable to the Company’s
secured borrowings of the same or similar maturities. This fair value measurement
is
classified as Level 2.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-107-
NOTE 16 - Income Taxes
Income Tax
Provision
The Company’s income
tax provision consisted of the following components:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands)
Current:
Federal
$
$
$
State
Total current
Deferred
Federal
(
10,437
)
State
(
1,574
)
(
320
)
Total deferred
(
12,011
)
Total income
tax (benefit) expense
$
(
3,468
)
$
$
In accordance with U.S. GAAP,
uncertain tax positions taken or expected to
be taken in a tax return are subject to potential financial
statement recognition based on prescribed
recognition and measurement criteria. Based on our
evaluation,
result for years ended December 31,
2020, 2019 or 2018
. We do
not expect our unrecognized tax positions to change
significantly
over the next 12 months
. No material income tax interest or penalties were incurred or accrued for the years
ended December 31,
2020, 2019 or 2018.
The Company is currently under examination by the IRS for tax years ending
December 31, 2013 to 2018 resulting from Joint
Committee Review as part of the IRS refund claim. The Company remains
subject to examination for the 2017 tax year to the present
under regular statute of limitations.
The Company files state income tax returns in various states which may have
different statutes of
limitations. Generally,
state income tax returns for the years 2017 through the present are subject
to examination.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-108-
Deferred Income Taxes,
net
The sources of these temporary differences and the related
tax effects were as follows:
December 31,
2020
2019
(Dollars in thousands)
Deferred income tax assets:
Allowance for credit losses
(1)
$
$
Net operating loss
Accrued expenses
Deferred income
Deferred compensation
Other comprehensive loss
Amortization of intangibles
Other
Gross deferred income tax assets
Valuation
allowance
(
263
)
(
258
)
Deferred tax assets, net of valuation allowance
Deferred income tax liabilities:
Lease accounting
(
36,885
)
(
41,770
)
Deferred acquisition costs
(
1,326
)
(
1,960
)
Depreciation
(
1,686
)
(
971
)
Deferred income tax liabilities
(
39,897
)
(
44,701
)
Net deferred income tax liability
$
(
22,604
)
$
(
30,828
)
__________________
(1)
The Company increased its deferred tax asset related to the Allowance for
credit losses by $
connection with the tax effect of the adoption of CECL. See Note 2,
Summary of Significant Accounting Policies, for further
information on adopting that accounting standard.
The Company's gross deferred tax assets are reduced by valuation allowances
if it is more likely than not that some portion of the
deferred tax asset will not be realized. The Company’s
evaluation of the realizability of its gross deferred tax asset as of December 31,
2020 resulted in a valuation allowance relating to certain state loss carryforwards.
The Company has
had a gross federal income tax net operating loss carryforward of $
Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), federal
net operating losses arising in tax years beginning
after
December 31, 2017 and before January 1, 2021, may be carried back
to each of the five tax years preceding the tax year of such loss.
The Company has elected to carryback its federal net operating loss resulting
in a $
$
% federal tax rate on the deferred tax asset for the net operating loss
compared to the federal tax rate in the year the net operating loss was utilized (
%). This refund was received in July 2020. The
Company has a gross state income tax net operating loss carryforward
in the amount of $
ending December 31, 2020 and December 31, 2019, respectively.
Most of the state net operating loss carryforwards are set to expire
between
.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-109-
Tax Rate
The following is a reconciliation of the statutory federal income tax
rate to the effective income tax
rate:
Year Ended December 31,
2020
2019
2018
Statutory federal income tax rate
%
%
%
(
2.4
)
(
17.1
)
(
0.2
)
(
0.7
)
(
4.9
)
(
0.2
)
(
0.2
)
Effective rate
%
%
%
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-110-
NOTE 17-
Earnings Per Share
The Company’s restricted stock
awards are paid non-forfeitable common stock dividends and thus meet
the criteria of participating
securities. Accordingly,
earnings per share (“EPS”) has been calculated using the two-class method, under
which earnings are
allocated to both common stock and participating securities.
Basic EPS has been computed by dividing net income or loss allocated to common
stock by the weighted average common shares
used in computing basic EPS. For the computation of basic EPS, all shares of
restricted stock have been deducted from the weighted
average shares outstanding.
Diluted EPS has been computed by dividing net income or loss allocated to
common stock by the weighted average number of
common shares used in computing basic EPS, further adjusted by including
the dilutive impact of the exercise or conversion of
common stock equivalents, such as stock options, into shares of common
stock as if those securities were exercised or converted.
The following table provides net income and shares used in computing basic
and diluted EPS:
Year Ended December 31,
2020
2019
2018
(Dollars in thousands, except per-share data)
Basic EPS
Net income
$
$
$
Less: net income allocated to participating securities
(
3
)
(
339
)
(
432
)
Net income allocated to common stock
$
$
$
Weighted average
common shares outstanding
Less: Unvested restricted stock awards considered participating
securities
(
143,963
)
(
153,482
)
(
217,045
)
Adjusted weighted average common shares used in computing
basic EPS
Basic EPS
$
$
$
Diluted EPS
Net income allocated to common stock
$
$
$
Adjusted weighted average common shares used in computing
basic EPS
Add: Effect of dilutive stock-based compensation
awards
Adjusted weighted average common shares used in computing
diluted EPS
Diluted EPS
$
$
$
For the years ended December 31, 2020, 2019 and 2018, weighted
average outstanding stock-based compensation awards in the
amount of
,
, respectively, were considered
antidilutive and therefore were not considered in the
computation of potential common shares for purposes of diluted EPS.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-111-
NOTE 18 - Stockholders’ Equity
Stockholders’ Equity
On July 29, 2014, the Company’s
Board of Directors approved the 2014 Repurchase Plan, under which,
the Company was authorized
to repurchase up to $
Directors approved the 2017 Repurchase Plan (the “2017 Repurchase
Plan”) to replace the 2014 Repurchase Plan. Under the 2017
Repurchase Plan, the Company was authorized to repurchase up to $
December 31, 2019, there was
On August 1, 2019, the Company’s
Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) under
which
the Company is authorized to repurchase up to $
exercised from time to time and in such amounts as market conditions warrant.
The repurchases may be made on the open market, in
block trades or otherwise. The stock repurchase program does not obligate
the Company to acquire any particular amount of common
stock, and it may be suspended at any time at the Company's discretion. The repurchases are
funded using the Company’s working
capital. At December 31, 2020, the Company had $
Any shares purchased under this plan are returned to the status of authorized
but unissued shares of common stock. Par value of the
shares repurchased is charged to common stock
with the excess of the purchase price over par charged against any available
additional
paid-in capital.
During the year ended December 31, 2020, the Company purchased
2019 Repurchase Plan at an average cost of $
. During the year ended December 31, 2019, the Company purchased
of its common stock in the open market under the 2019 Repurchase Plan
at an average cost of $
its common stock in the open market under the 2017 Repurchase Plan at an
average cost of $
December 31, 2018, the Company purchased
at an average cost of $
.
In addition to the repurchases described above, participants in
the Company’s 2003 Equity Compensation
Plan, as amended (the “2003
Plan”),the Company’s 2014
Equity Compensation Plan (approved by the Company’s
shareholders on June 3, 2014) and the
Company’s 2019 Equity
Compensation Plan (approved by the Company’s
shareholders on May 30, 2019) (the “2019 Plan” and,
together with the 2014 Plan and the 2003 Plan, the “Equity Compensation
Plans”)may have shares withheld to cover income taxes.
There were
,
the Equity Plans during the years ended December 31, 2020, 2019 and
2018, respectively, at average
per-share costs of $
, $
and $
, respectively.
Regulatory Capital Requirements
Through its issuance of FDIC-insured deposits, MBB serves as the Company’s
primary funding source. Over time, MBB may offer
other products and services to the Company’s
customer base. MBB operates as a Utah state-chartered, Federal Reserve member
commercial bank, insured by the FDIC. As a state-chartered Federal Reserve
member bank, MBB is supervised by both the Federal
Reserve Bank of San Francisco and the Utah Department of Financial Institutions.
The Company and MBB are subject to capital adequacy regulations issued
jointly by the federal bank regulatory agencies. These risk-
based capital and leverage guidelines make regulatory capital requirements more
sensitive to differences in risk profiles among
banking organizations and consider off
-balance sheet exposures in determining capital adequacy.
The federal bank regulatory agencies
and/or the U.S. Congress may determine to increase capital requirements
in the future due to the current economic environment.
Under the capital adequacy regulation, at least half of a banking organization’s
total capital is required to be "Tier 1 Capital" as
defined in the regulations, comprised of common equity,
retained earnings and a limited amount of non-cumulative perpetual
preferred stock. The remaining capital, "Tier
2 Capital," as defined in the regulations, may consist of other preferred stock, a limited
amount of term subordinated debt or a limited amount of the reserve for possible
credit losses. The regulations establish minimum
leverage ratios for banking organizations, which
are calculated by dividing Tier 1 Capital by total average
assets. Recognizing that the
risk-based capital standards principally address credit risk rather than
interest rate, liquidity, operational
or other risks, many banking
organizations are expected to maintain capital in excess
of the minimum standards.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-112-
The Company and MBB operate under the Basel III capital adequacy standards
.
These standards require a minimum for Tier 1
leverage ratio of
%, minimum Tier 1 risk-based ratio of
%, and a total risk-based capital ratio of
%.
The Basel III capital adequacy
standards established a new common equity Tier
1 risk-based capital ratio with a required
% minimum (
% to be considered
well-capitalized). The Company is required to have a level of regulatory
capital in excess of the regulatory minimum and to have a
capital buffer above
%. If a banking organization does not maintain capital above the
minimum plus the capital conservation buffer
it may be subject to restrictions on dividends, share buybacks, and certain discretionary
payments such as bonus payments.
CMLA Agreement.
On March 25, 2020, MBB received notice from the FDIC that it had approved
MBB’s request to rescind certain
nonstandard conditions in the FDIC’s
order granting federal deposit insurance issued on March 20, 2007.
Furthermore, effective
March 26, 2020, the FDIC, the Company and certain of the Company’s
subsidiaries terminated the Capital Maintenance and Liquidity
Agreement (the “CMLA Agreement”) and the Parent Company
Agreement, each entered into by and among the Company,
certain of
its subsidiaries and the FDIC in conjunction with the opening of MBB. As a result of
these actions, MBB is no longer required
pursuant to the CMLA Agreement to maintain a total risk-based capital ratio
above
%. Rather, MBB must continue to maintain a
total risk-based capital ratio above
% in order to maintain “well-capitalized” status as defined by banking regulations,
while the
Company must continue to maintain a total risk-based capital ratio as discussed
in the immediately preceding paragraph. The
additional capital released by the termination of the CMLA Agreement
is held at MBB and is subject
to the restrictions outlined in
Title 12 part 208 of the Code of Federal Regulations
(12 CFR 208.5), which places limitations on bank dividends, including
restricting
dividends for any year to the earnings from the current and prior two calendar
years, less any dividends already paid during the period.
Any dividends declared above that amount and any return of permanent capital
would require prior approval of the Federal Reserve
Board of Governors. As of December 31, 2020, MBB does not have the capacity
to pay dividends to the Company without explicit
approval from the Federal Reserve Board of Governors.
MBB’s Tier 1
Capital balance at December 31, 2020 was $
and qualified MBB for “well-capitalized” status. At December 31, 2020
,
the Company also exceeded its regulatory capital
requirements and was considered “well-capitalized” as defined by federal
banking regulations and as required by the FDIC
Agreement.
CECL Capital Transition.
The Company adopted
CECL, or a
new measurement methodology
for the allowance
estimate, on January
1,
2020,
as discussed
further
in
Note
2—Summary
of Significant
Accounting
Policies.
Rules governing
the
Company’s
regulatory
capital requirements
give entities
the option
of delaying
for two
years the
estimated impact
of CECL
on regulatory
capital, followed
by a
three-year transition
period to
phase out
the aggregate
amount of
capital benefit,
or a
five-year transition
in total.
The Company
has
elected
to avail
itself of
the five-year
transition.
For measurements
of regulatory
capital in
2020
and
2021,
under the
two year
delay the Company shall prepare: (i) a measurement of
its estimated allowance for credit losses under CECL, as reported
in its balance
sheets;
and
(ii)
a
measurement
of
its
estimated
allowance
under
the
historical
incurred
loss
methodology,
as
prescribed
by
the
regulatory
calculation.
Any amount
of
provisions
under CECL
that
is in
excess
of
the
incurred
estimate
will be
an
adjustment
the
Company’s
capital during
the two-year
delay.
The three-year
transition, starting
in 2022,
will phase
in that
adjustment straight
-line,
such that
% over
each of
the next
two
years, such that we will
have phased in
% of the adjustment during
year three.
At the beginning of
year 6 (2025) the Company
will
have completely reflected the effects of CECL in its regulatory
capital.
The following table sets forth the Tier 1
leverage ratio,
common equity Tier 1 risk-based capital ratio,
Tier 1 risk-based capital ratio
and total risk-based capital ratio for Marlin Business Services Corp. and MBB at December
31, 2020 and 2019.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-113-
December 31, 2020
Minimum Capital
Well-Capitalized Capital
Actual
Requirement
Requirement
Ratio
Amount
Ratio
(1)
Amount
Ratio
Amount
(Dollars in thousands)
Tier 1 Leverage Capital
$
$
$
$
$
$
Common Equity Tier 1 Risk-Based Capital
$
$
$
$
$
$
Tier 1 Risk-based Capital
$
$
$
$
$
$
Total
Risk-based Capital
$
$
$
$
$
$
December 31, 2019
Minimum Capital
Well-Capitalized Capital
Actual
Requirement
Requirement
Ratio
Amount
Ratio
(1)
Amount
Ratio
Amount
(Dollars in thousands)
Tier 1 Leverage Capital
$
$
$
$
$
$
Common Equity Tier 1 Risk-Based Capital
$
$
$
$
$
$
Tier 1 Risk-based Capital
$
$
$
$
$
$
Total
Risk-based Capital
$
$
$
$
$
$
Prompt Corrective Action.
regulators to take prompt corrective action against any undercapitalized institution.
Five capital categories have been established
under federal banking regulations:
well-capitalized, adequately capitalized, undercapitalized, significant
ly undercapitalized and
critically undercapitalized. Well
-capitalized institutions significantly exceed the required minimum
level for each relevant capital
measure. Adequately capitalized institutions include depository
institutions that meet but do not significantly exceed the required
minimum level for each relevant capital measure. Undercapitalized institutions
consist of those that fail to meet the required minimum
level for one or more relevant capital measures. Significantly
undercapitalized characterizes depository institutions with capital levels
significantly below the minimum requirements for any relevant capital
measure. Critically undercapitalized refers to depository
institutions with minimal capital and at serious risk for government
seizure.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-114-
Under certain circumstances, a well-capitalized, adequately capitalized
or undercapitalized institution may be treated as if the
institution were in the next lower capital category.
A depository institution is generally prohibited from making capital distributions,
including paying dividends, or paying management fees to a holding company
if the institution would thereafter be undercapitalized.
Institutions that are adequately capitalized but not well-capitalized
cannot accept, renew or roll over brokered deposits except with a
waiver from the FDIC and are subject to restrictions on the interest rates that
can be paid on such deposits. Undercapitalized
institutions may not accept, renew or roll over brokered deposits.
The federal bank regulatory agencies are permitted or,
in certain cases, required to take certain actions with respect to institutions
falling within one of the three undercapitalized categories.
Depending on the level of an institution’s
capital, the agency’s corrective
powers include, among other things:
•
prohibiting
the
payment
of
principal
and
interest
on
subordinated
debt;
•
prohibiting
the
holding
company
from
making
distributions
without
prior
regulatory
approval;
•
placing
limits
on
asset
growth
and
restrictions
on
activities;
•
placing
additional
restrictions
on
transactions
with
affiliates;
•
restricting
the
interest
rate
the
institution
may
pay
on
deposits;
•
prohibiting
the
institution
from
accepting
deposits
from
correspondent
banks;
and
•
in
the
most
severe
cases,
appointing
a
conservator
or
receiver
for
the
institution.
A banking institution that is undercapitalized is required to submit a capital
restoration plan, and such a plan will not be accepted
unless, among other things, the banking institution’s
holding company guarantees the plan up to a certain specified amount.
Any such
guarantee from a depository institution’s
holding company is entitled to a priority of payment in bankruptcy.
MBB’s total risk-based capital
ratio of
% at December 31, 2020 exceeded the threshold for “well capitalized” status under
the
applicable laws and regulations.
Dividends
.
The Federal Reserve Board has issued policy statements requiring insured banks
and bank holding companies to have an
established assessment process for maintaining capital commensurate
with their overall risk profile. Such assessment process may
affect the ability of the organizations to
pay dividends. Although generally organizations may
pay dividends only out of current
operating earnings, dividends may be paid if the distribution is prudent
relative to the organization’s
financial position and risk profile,
after consideration of current and prospective economic conditions. As mentioned
above, MBB’s ability to pay dividends to the
Company is subject to various regulatory requirements, including
Title 12 part 208 of the Code of Federal Regulations (12 CFR
208.5), which places limitations on bank dividends. Furthermore,
as a bank holding company, the
Company’s ability to pay dividends
to its shareholders is also subject to various regulatory requirements, including
Supervisory Letter SR 09-4, Applying Supervisory
Guidance and Regulations on the Payment of Dividends, Stock Redemptions
and Stock Repurchases at Bank Holding Companies.
NOTE 19 - Stock-Based Compensation
Awards
for
Stock-Based
Compensation
are
governed
by
the
Company’s
2003
Equity
Compensation
Plan,
as
amended
(the
“2003
Plan”), the Company’s
2014 Equity Compensation Plan
(approved by the Company’s
shareholders on June 3, 2014)
(the “2014 Plan”)
and
the Company’s
2019 Equity
Compensation
Plan (approved
by the
Company’s
shareholders
on May
30, 2019)
(the “2019
Plan”
and, together
with the 2014
Plan and the
2003 Plan, the
“Equity Compensation
Plans”).
Under the
terms of the
Equity Compensation
Plans,
employees,
certain
consultants
and
advisors
and
non-employee
members
of
the
Company’s
Board
of
Directors
have
the
opportunity to
receive incentive
and nonqualified
grants of
stock options,
stock appreciation
rights, restricted
stock and
other equity-
based
awards
as
approved
by
the
Company’s
Board
of
Directors.
These
award
programs
are
used
to
attract,
retain
and
motivate
employees and to
encourage individuals in
key management roles to
retain stock.
The Company has a
policy of issuing new
shares to
satisfy
awards
under
the
Equity
Compensation
Plans.
The
aggregate
number
of
shares
under
the
2019
Plan
that
may
be
issued
for
Grants is
. There were
Total
stock-based
compensation
expense
was
$
2019
and
2018,
respectively.
Excess
tax
benefits
from
stock-based
payment
arrangements
was
$
million for the years ended December 31, 2020, 2019 and 2018, respectively.
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-115-
Stock Options
Option awards are generally granted with an exercise price equal to
the market price of the Company’s stock
at the date of the grant
and have
the Company and may provide for accelerated vesting if there is a change
in control as defined in the Equity Compensation Plans.
Employee stock options generally vest over
.
There were
There were
estimated on the date of grant using the Black-Scholes option pricing
model using the following weighted average assumptions:
Year Ended
December 31, 2018
Risk-free interest rate
Expected life (years)
Expected volatility
Expected dividends
The expected life for options is estimated based on their vesting and contractual
terms and was determined by applying the simplified
method as defined by the SEC’s Staff
Accounting Bulletin No. 107 (“SAB 107”). The risk-free interest rate reflected
the yield on
zero-coupon Treasury securities with a term
approximating the expected life of the stock options. The expected volatility
was
determined using historical volatilities based on historical stock prices.
A summary of option activity for the each of the three years in the period
ended December 31, 2020 follows:
Weighted
Average
Number of
Exercise Price
Options
Shares
Per Share
Outstanding, December 31, 2017
$
(
909
)
(
17,827
)
(
507
)
Outstanding, December 31, 2018
$
(
6,948
)
(
4,324
)
Outstanding, December 31, 2019
$
(
3,929
)
(
17,048
)
Outstanding, December 31, 2020
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-116-
During the years
ended December 31, 2020,
2019 and 2018,
the Company recognized total compensation
expense related to options
of $
There were
options exercised during the year ended December 31, 2018. The total
pretax intrinsic value of stock options exercised was $
million for the year ended December 31, 2018.
The following table summarizes information about the stock options
outstanding and exercisable as of December 31, 2020:
Options Outstanding
Weighted
Weighted
Aggregate
Weighted
Weighted
Average
Average
Intrinsic
Average
Average
Range of
Number
Remaining
Exercise
Value
Number
Remaining
Exercise
Exercise Prices
Life (Years
)
Price
(In thousands)
Exercisable
Life (Years
)
Price
(In thousands)
$
$
$
$
$
$
$
$
$
$
The aggregate intrinsic value in the preceding table represents the total pretax
intrinsic value, based on the Company’s closing
stock
price of $
options as of that date.
As of December 31, 2020, there was $
recognized in the Consolidated Statements of Operations scheduled
to be recognized over a weighted average period of
Restricted Stock Awards
The Company’s Restricted stock awards
provide that, during the applicable vesting periods, the shares awarded may
not be sold or
transferred by the participant. The vesting period for restricted
stock awards generally ranges from
. All awards
issued contain service conditions based on the participant’s
continued service with the Company and provide for accelerated vesting
if
there is a change in control as defined in the Equity Compensation Plans.
The vesting of certain restricted shares may be accelerated to a minimum
of
performance measures. Acceleration of expense for awards based
on individual performance factors occurs when the achievement of
the performance criteria is determined. Vesting
was accelerated in 2019 on certain awards based on the achievement of certain
performance criteria determined annually,
as described below.
The Company also issues restricted stock to non-employee independent
directors.
These shares generally vest in
grant date or
The following table summarizes the activity of the non-vested restricted
stock during the each of the three years in the period ended
December 31, 2020:
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-117-
Weighted
Average
Number of
Grant-Date
Non-vested restricted stock
Shares
Outstanding at December 31, 2017
$
(
93,764
)
(
15,456
)
Outstanding at December 31, 2018
$
(
56,606
)
(
4,986
)
Outstanding at December 31, 2019
$
(
38,384
)
(
2,900
)
Outstanding at December 31, 2020
$
During the years ended December 31, 2020,
2019 and 2018, the Company granted restricted stock awards with grant date fair values
totaling $
closing stock price on the date of the grant.
As vesting occurs, or is deemed likely to occur,
compensation expense is recognized over the requisite service period and additional
paid-in capital is increased. The Company recognized $
restricted stock for the years ended December 31, 2020,
2019 and 2018,
respectively.
Of the $
related to accelerated vesting based on the achievement of certain performance
criteria determined annually.
Of the $
compensation expense related to restricted stock for the year ended
December 31, 2019, approximately $
accelerated vesting during the first quarter of 2019,
which was also based on the achievement of certain performance criteria
determined annually.
As of December 31, 2020, there was $
compensation scheduled to be recognized over a weighted average period
of
restricted stock awards outstanding for which vesting may be accelerated
based on achievement of individual performance measures.
The fair values of shares that vested during the years ended December
31, 2020, 2019 and 2018 were $
$
Restricted Stock Units
Restricted stock units (“RSUs”) are granted with vesting conditions based
on fulfillment of a service condition (generally
based targets associated with the Company’s
stock price or relative total shareholder
return, or a combination of both performance
criteria and market-based targets. For market-based
target awards granted during 2016 and 2017, the performance period
began
performance period begins on the grant date and ends
and service conditions is recognized over the service period based on
the grant-date fair value of the award.
The following tables summarize market restricted stock unit activity during
the each of the three years in the period ended December
31, 2020:
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-118-
Weighted
Average
Number of
Grant-Date
Performance-based & market-based RSUs
RSUs
Outstanding at December 31, 2017
$
Granted
Forfeited
(
1,688
)
Converted
Outstanding at December 31, 2018
$
Granted
Forfeited
(
17,853
)
Converted
(
8,000
)
Cancelled due to non-achievement of market or performance
condition
(
4,000
)
Outstanding at December 31, 2019
$
Granted
Forfeited
(
5,081
)
Converted
(
65,810
)
Cancelled due to non-achievement of market or performance
condition
(
56,390
)
Outstanding at December 31, 2020
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-119-
Weighted
Average
Number of
Grant-Date
RSUs
Service-based RSUs
Outstanding at December 31, 2017
$
Granted
Forfeited
(
5,606
)
Converted
(
8,441
)
Outstanding at December 31, 2018
$
Granted
Forfeited
(
13,033
)
Converted
(
22,892
)
Outstanding at December 31, 2019
$
Granted
Forfeited
(
24,016
)
Converted
(
40,263
)
Outstanding at December 31, 2020
The weighted average grant-date fair value of RSUs with both performance
and market based vesting conditions granted during the
twelve-month periods ended December 31, 2020 and 2019 was $
vesting conditions based on both performance and market conditions
granted during the twelve-month period ended 2018. There were
2019 and 2018.
The weighted average grant-date fair value of RSUs with market based vesting
conditions granted during the twelve-
month period ended December 31, 2020 was $
was estimated using a Monte Carlo simulation valuation model with the following
assumptions:
Year Ended December 31,
Performance and market-based vesting
conditions
2020
2019
2018
Grant date stock price
$
$
Risk-free interest rate
%
%
%
Expected volatility
%
%
%
Dividend yield
Year Ended December 31,
Market-based vesting conditions
2020
2019
2018
Grant date stock price
$
Risk-free interest rate
%
%
%
Expected volatility
%
%
%
Dividend yield
The risk-free interest rate reflected the yield on zero coupon Treasury
securities with a term approximating the expected life of the
RSUs. The expected volatility was based on historical volatility of
the Company’s common stock. Dividend
yield was assumed at zero
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-120-
as the grant assumes dividends distributed during the performance period
are reinvested.
When valuing the grant, we have assumed a
dividend yield of zero, which is mathematically equivalent to reinvesting
dividends in the issuing entity.
During the years ended December 31, 2020, 2019 and 2018, the Company
granted RSUs with grant-date fair values totaling $
million, $
during the years ended December 31, 2020, 2019 and 2018, was $
Company recognized $
December 31, 2020, 2019 and 2018, respectively.
During the year ended December 31, 2020, the Company reversed $
previously recognized compensation expense related to RSUs based on
the adjustment of the most probable performance assumptions
related to certain non-market performance awards.
As of December 31, 2020, there was $
million of unrecognized compensation cost related to RSUs scheduled to be recognized
over
a weighted average period of
years based on the most probable performance assumptions.
In the event maximum performance
targets are achieved, an additional $
years. As of December 31, 2020,
probable performance assumptions. In the event maximum performance
targets are achieved,
convert to shares of common stock.
Employee Stock Purchase Plan
In May 2012, the Company’s shareholders
approved the adoption of the Company’s
2012 Employee Stock Purchase Plan (the “2012
ESPP”). Under the terms of the 2012 ESPP,
employees had the opportunity to set aside up to
% of their compensation (subject to
certain maximums) to purchase shares of common stock during designated
offering periods at a price equal to the lesser of
% of the
fair market value per share on the first day of the offering
period or the fair market value per share on the purchase date. The aggregate
number of shares that was available for issuance under the 2012 ESPP was
. During the years ended 2020 and 2019,
and
the 2012 ESPP.
As of December 31, 2020, there were
recognized total compensation expense of $
and 2018, respectively
.
NOTE 20 - Employee 401(k) Plan
December 31, 2020, 2019 and 2018 were approximately $
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-121-
NOTE 21 – Parent Company
Summarized financial information of the parent company is as follows:
Parent Company – Balance Sheet
December 31,
2020
2019
ASSETS
(Dollars in thousands, except per-
share data)
Investment in and advances to subsidiaries:
$
$
Total assets
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Total liabilities
$
$
Stockholders’ equity:
Total liabilities and stockholders’
equity
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-122-
Parent Company – Income Statement
Year
Ended December 31,
2020
2019
2018
(Dollars in thousands)
Income:
$
$
$
Total revenue
Total expense
Income before income taxes and equity in undistributed
Equity in undistributed income (loss):
(
2,281
)
(
3,417
)
(
8,804
)
(
1,962
)
(
1,534
)
Net Income
$
$
$
Other comprehensive income:
Reclassification due to adoption of ASU 2016-01, ASU 2018-02 and
ASU 2018-03
Increase (decrease) in fair value of securities available for sale
(
7
)
Tax effect
(
4
)
(
36
)
(
48
)
Total other comprehensive
income
Comprehensive income
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-123-
Parent Company – Statement of Cash Flows
Year
Ended December 31,
2020
2019
2018
(Dollars in thousands)
Cash flows from operating activities:
Net income
$
$
$
Adjustments to reconcile net income to net cash from
Equity in undistributed net income of subsidiaries
(
342
)
(
21,116
)
(
4,980
)
Net cash provided by operating activities
Cash flows from investing activities:
Capital returned from nonbank subsidiaries
Capital contributed to subsidiaries
(
146
)
(
6,484
)
(
20,492
)
Net cash provided by (used in) investing activities
(
10,561
)
Cash flows from financing activities:
(
4,703
)
(
7,323
)
(
2,908
)
(
6,698
)
(
6,865
)
(
6,956
)
Net cash used in financing activities
(
11,281
)
(
13,778
)
(
9,439
)
Net increase in total cash and cash equivalents
Total cash and cash
equivalents, beginning of period
Total cash and cash
equivalents, end of period
$
$
$
MARLIN BUSINESS SERVICES CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
-124-
NOTE 22 - Events Subsequent to Year
-End
The Company declared a dividend of $
. The quarterly dividend, which amounted to a dividend
payment of approximately $
. It represented the Company’s
-125-
Supplementary Data
The selected unaudited quarterly financial data presented below should
be read in conjunction with the Consolidated Financial
Statements and related notes.
Selected Quarterly Financial Data (Unaudited)
Fiscal Year Quarters
First
Second
Third
Fourth
(Dollars in thousands, except per-share data)
Year
ended December 31, 2020
Interest income
$
$
$
$
Fee income
Interest and fee income
Interest expense
Provision for credit losses
(
12,651
)
Non-interest income
Income tax expense (benefit)
(
7,434
)
(
1,374
)
Net income (loss)
(
11,821
)
(
5,882
)
Basic earnings (loss) per share
(
1.00
)
(
0.50
)
Diluted earnings (loss) per share
(
1.00
)
(
0.50
)
Cash dividends declared per share
Net investment in leases and loans
Total assets
Year
ended December 31, 2019
Interest income
$
$
$
$
Fee income
Interest and fee income
Interest expense
Provision for credit losses
Non-interest income
Income tax expense
Net income
Basic earnings per share
Diluted earnings per share
Cash dividends declared per share
Net investment in leases and loans
Total assets
-126-
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A.
Controls and Procedures
Disclosure Controls
and Procedures
information required to be disclosed in the Company’s
reports under the Securities Exchange Act of 1934, as amended
(the “1934
Act”) is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated
to management, including the Company’s
Chief
Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on Form 10
-K, as of December 31, 2020,
we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the 1934 Act.
This controls evaluation was done under the supervision and with the participation
of management, including our Chief Executive
Officer and our Chief Financial Officer.
Our Chief Executive Officer and our Chief Financial Officer
have concluded that our
disclosure controls and procedures (as defined in Rule 13(a)-15(e)
and 15(d)-15(e) under the 1934 Act) are designed and operating
effectively to provide reasonable assurance that
information relating to us and our subsidiaries that we are required to disclose in the
reports that we file or submit to the Securities and Exchange Commission is accumulated
and communicated to management as
appropriate to allow timely decisions regarding required disclosure, and is recorded,
processed, summarized and reported with the
time periods specified in the Securities and Exchange Commission’s
rules and forms.
Management’s
Annual Report on Internal Control over Financial
Reporting
Officer provided a report on behalf of management on our interna
l
control over financial reporting. The full text of management’s
report is contained in Item 8 of this Form 10-K and is incorporated herein by reference.
Attestation Report of the Registered Public
Accounting Firm
firm on their assessment of internal control over financial reporting is contained
in Item 8 of this Form 10-K and is incorporated herein
by reference.
Changes in Internal Control Over Financial
Reporting
reporting identified in connection with management’s
evaluation that occurred during the three months ended December 31,
2020 that
have materially affected, or are reasonably likely to
materially affect, the Company’s
internal control over financial reporting.
Item 9B.
Other Information
None.
-127-
PART
III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by Item 10 is incorporated by reference from
the information in the Registrant’s definitive
Proxy Statement
to be filed pursuant to Regulation 14A for its 2021 Annual Meeting of Shareholders.
We have adopted
a code of ethics and business conduct that applies to all of our directors, officers
and employees, including our
principal executive officer,
principal financial officer, principal accounting
officer and persons performing similar functions. Our code
of ethics and business conduct is available free of charge
within the investor relations section of our website at
www.marlincapitalsolutions
.com.
We intend to post
on our website any amendments and waivers to the code of ethics and business
conduct that are required to be disclosed by the rules of the Securities and
Exchange Commission, or file a Form 8-K, Item 5.05 to the
extent required by NASDAQ listing standards.
Item 11.
Executive Compensation
The information required by Item 11 is incorporated
by reference from the information in the Registrant’s
definitive Proxy Statement
to be filed pursuant to Regulation 14A for its 2021 Annual Meeting of Shareholders.
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information required by Item 12 is incorporated by reference from
the information in the Registrant’s definitive
Proxy Statement
to be filed pursuant to Regulation 14A for its 2021 Annual Meeting of Shareholders.
Item 13.
Certain Relationships and Related Transactions, and
Director Independence
The information required by Item 13 is incorporated by reference from
the information in the Registrant’s definitive
Proxy Statement
to be filed pursuant to Regulation 14A for its 2021 Annual Meeting of Shareholders.
Item 14.
Principal Accountant Fees and Services
The information required by Item 14 is incorporated by reference from
the information in the Registrant’s definitive
Proxy Statement
to be filed pursuant to Regulation 14A for its 2021 Annual Meeting of Shareholders.
-128-
PART
IV
Item 15.
Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this Report
The
following
is
a
list
of
consolidated
and
combined
financial
statements
and
supplementary
data
included
in
this
report
under
Item 8 of Part II hereof:
1.
Financial
Statements
and
Supplemental
Data
Reports
of
Independent
Registered
Public
Accounting
Firm
.
Consolidated
Balance
Sheets
as
of
December
31,
2020
and
2019
.
Consolidated
Statements
of
Operations
for
the
years
ended
December
31,
2020
,
2019
and
2018
.
Consolidated Statements of Comprehensive Income for the years ended
December 31, 2020,
2019 and 2018.
Consolidated
Statements
of
Stockholders’
Equity
for
the
years
ended
December
31,
2020
,
2019
and
2018
.
Consolidated
Stat
ements
of
Cash
Flows
for
the
years
ended
December
31,
2020
,
2019
and
2018
.
Notes
to
Consolidated
Financial
Statements.
Supplementary
Data.
2.
Financial
Statement
Schedules
Schedules
are
omitted
because
they
are
not
applicable
or
are
not
re
quired
or
because
the
required
information
is
included
in
the
consolidated and combined financial statements or notes thereto.
(b)
Exhibits
Number
Description
3.1
(2)
3.2
(12)
3.3
(16)
4.1
(1)
4.2
(15)
10.1
(5)†
10.2
(4)†
10.3
(4)†
10.4
(4)†
10.5
(5)†
10.6
(3)
10.7
(6)
†
10.8
(7)
†
10.9
(
8
)
†
10.11
(9)†
10.12
(10)†
10.13
(11)†
10.14
(14)†
10.15
(13)†
-129-
10.16
(15)†
10.17
(17)†
10.18
(17)†
10.19
(17)†
10.20
(18)†
10.21
(19)†
21.1
23.1
31.1
31.2
32.1
101
Financial
statements
from
the
Annual
Report
on
Form
10
-
K
of
the
Company
for
the
period
ended
December
31,
2020
,
formatted
in
XBRL:
(i)
the
Consolidated
Balance
Sheets,
(ii)
the
Consolidated
Statements
of
Operations,
(iii)
the
Consolidated
Statements
of
Comprehensive
Income,
(iv) the
Consolidated
Statements
of
Stockholders’
Equity,
(v) the
Consolidated
Statements
of
Cash
Flows
and
(v
i
)
the
Notes
to
Consolidated
Financial
Statemen
ts
(Submitted
electronically with this report).
____________________
†
Management contract or compensatory plan or arrangement.
(1)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Amendment
No.
1
to
Registration Statement on Form S-1 (File No. 333-108530), filed on October
14, 2003 and incorporated by reference herein.
(2)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Annual
Report
on
Form
10
-
K
for the fiscal year ended December 31, 2007 filed on March 5, 2008
and incorporated by reference herein.
Previously filed with
the Securities and
Exchange Commission
as an exhibit
to the Registrant’s
Current
Report on Form
8-K
dated March 11, 2008 and filed on March 17,
2008 and incorporated by reference herein.
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
dated October 28, 2009 and filed on November 2, 2009 and incorporated by
reference herein.
(5)
Previously
filed
with
the
Securi
ties
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Form
DEF
14A
filed
on
April
23, 2012 and incorporated by reference herein.
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on June 9, 2014 and incorporated by reference herein.
(7)
Previously
filed
with
the
Securities
and
Exchang
e
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on June 12, 2014 and incorporated by reference herein.
(8)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on June 12, 2014 and incorporated by reference herein.
(9)
Previously filed with the Securities and Exchange Commission as an
exhibit to the Registrant’s Quarterly
Report on Form
10-Q for the period ended June 30, 2015 filed on August 5, 2015 and incorporat
ed by reference herein.
-130-
(10)
Previously filed with the Securities and Exchange Commission as an
exhibit to the Registrant’s Current
Report on Form 8-K filed on May 5, 2016 and incorporated by reference herein
.
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on September 19, 2016 and incorporated by reference herein.
(12)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on October 20, 2016 and incorporated by reference herein.
(13)
Previously filed
with the
Securities and
Exchange Commission
as an
exhibit to
the Registrant’s
Current Report
on Form
8-K
filed on June 4, 2019 and incorporated by reference herein.
(14)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Annual
Report
on
Form
10
-
K
for the fiscal year ended December 31, 2018 filed on March 8, 2019
and incorporated by reference herein.
(15)
Previously filed with the Securities and Exchange Commission as an
exhibit to the Registrant’s Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 filed on
March 13, 2020 and incorporated by reference
herein.
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on April 24, 2020 and incorporated
by reference herein.
(17)
Previously
filed
with
the
Secur
ities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Quarterly
Report
on
Form
10-Q for the period ended March 31, 2020 filed on May 1, 2020 and incorporated
by reference herein.
(18)
Previously
file
d
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Quarterly
Report
on
Form
10-Q for the period ended June 30,
2020 filed on July 31, 2020 and incorporated by reference herein.
(19)
Previously
filed
with
the
Securities
and
Exchange
Commission
as
an
exhibit
to
the
Registrant’s
Current
Report
on
Form
8
-
K
filed on December 18, 2020 and incorporated by reference herein.
-131-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 5, 2021
M
ARLIN
B
USINESS
S
ERVICES
C
ORP
.
By:
/s/
JEFFREY
HILZINGER
Jeffrey Hilzinger
Chief Executive Officer
Pursuant to the requirements of the
Securities Exchange Act of 1934, this
report has been signed below by
the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ J
EFFREY
H
ILZINGER
Chief Executive Officer
March 5, 2021
Jeffrey Hilzinger
(Principal Executive Officer)
/s/ M
ICHAEL
R.
B
OGANSKY
Michael R. Bogansky
Chief Financial Officer and
Senior Vice President
(Principal Financial and
Accounting Officer)
March 5, 2021
/s/ L
AWRENCE
J.
D
E
A
NGELO
Chairman of the Board of Directors
March 5, 2021
Lawrence J. DeAngelo
/s/ J
OHN
J.
C
ALAMARI
Director
March 5, 2021
John J. Calamari
/s/ S
COTT
H
EIMES
Director
March 5, 2021
Scott Heimes
/s/ M
ATTHEW
J.
S
ULLIVAN
Director
March 5, 2021
Matthew J. Sullivan
/s/ J.
C
HRISTOPHER
T
EETS
Director
March 5, 2021
J. Christopher Teets
/s/ J
AMES
W.
W
ERT
Director
March 5, 2021
James W. Wert